Starting a new business in Canada can be exciting and rewarding! It also comes with responsibilities, including taxes – which can sometimes be confusing to wrap your head around. Understanding business taxes from the start can and will help you avoid problems later and keep your business running smoothly from the beginning. Whether you’re a sole proprietor or incorporated, this guide will walk you through the key things you need to know about taxes in Canada as a new business owner.
- Understanding the Different Types of Taxes for Businesses
One of the first things that new business owners in Canada need to understand is that there are several different types of taxes that might apply to their business. The main types include:
Income Tax: Like individuals, businesses must pay income tax on their earnings. How much you pay depends on your business structure. For sole proprietorships, you’ll report your business income on your personal tax return. Corporations, however, file a separate tax return and pay corporate income tax.
GST/HST (Goods and Services Tax / Harmonized Sales Tax): If your business earns more than $30,000 in a calendar year (or rolling 12 months), you must register for a GST/HST account with the Canada Revenue Agency (CRA). This tax is collected on most goods and services sold, and as a business owner, you’ll need to remit these payments to the government. This tax requires good record keeping as you can claim back the GST you pay on purchases to earn your revenue.
Payroll Tax: If you have employees, you’ll also need to consider payroll taxes. This includes Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax deductions, which you must withhold from your employees’ paychecks. You will also need to make your own contributions towards your employee’s CPP and EI (on top of their contributions).
Provincial Taxes: In addition to federal taxes, you may be responsible for paying provincial or territorial taxes. Each province has its own tax laws, so it’s essential to know your local regulations.
- Choosing the Right Business Structure
How your business is structured affects how you file taxes. There are three main business structures in Canada:
Sole Proprietorship: This is the simplest structure where the business owner is responsible for all profits, losses, and taxes. Income is reported on your personal tax return, and you pay personal income tax on your business earnings.
Partnership: In a partnership, the income or loss is divided among partners, and each partner includes their share of the business earnings on their personal tax return. Like sole proprietorships, partners pay personal income tax.
Corporation: When you incorporate your business, it becomes a separate legal entity. This means the corporation files its own taxes and pays corporate income tax rates, which can sometimes be lower than personal rates. Shareholders (which could be you) may also receive dividends, which are taxed differently than personal income.
Choosing the right structure is crucial because it can impact how much tax you pay and your personal liability. Many new business owners start as sole proprietors and later incorporate when the business grows.
- Understanding Deductions and Credits
One of the perks of owning a business in Canada is that you can take advantage of various tax deductions and credits to reduce your taxable income. Some common business expenses you can deduct include:
Home Office Expenses: If you work from home, you may be able to claim a portion of your rent, utilities, and internet bills as business expenses.
Vehicle Expenses: If you use a car for business purposes, you can deduct fuel, insurance, maintenance, and even a portion of lease payments or depreciation if you own the vehicle.
Supplies and Equipment: Things like office supplies, furniture, and equipment used for your business can be deducted. Be sure to keep detailed records and receipts.
Professional Fees: Costs for legal, accounting, and consulting services are deductible as business expenses.
Travel and Meals: If you travel for business or entertain clients, you may be able to deduct a portion of those costs. Just remember, meals and entertainment expenses are only 50% deductible.
Additionally, there are tax credits available to businesses, such as the Small Business Deduction, which lowers the corporate tax rate for eligible Canadian-controlled private corporations (CCPCs).
- Keeping Accurate Records
Good record-keeping is essential for filing your taxes correctly and minimizing the risk of an audit which no one wants to go through. The CRA requires businesses to keep records for at least six years, including:
Invoices and Receipts: Keep copies of all your business income and expenses.
Bank Statements: Ensure that your bank statements align with your business income and expenses.
Payroll Records: If you have employees, maintain accurate records of their wages, deductions, and contributions.
Using accounting software can help make this process easier, especially as your business grows. It’s also a good idea to consult, or even hire/outsource to, an accountant or bookkeeper to ensure your financial records are in order.
- Filing Your Taxes
When it comes time to file your taxes, knowing the deadlines is important to avoid penalties. Here are some key deadlines for Canadian business owners:
Personal Income Tax (for sole proprietors and partnerships): The tax-filing deadline is usually April 30, but if you or your spouse run a business, you have until June 15 to file your return. However, any taxes owing must still be paid by April 30 to avoid interest charges.
Corporate Income Tax: Corporations must file their tax returns within six months after the end of their fiscal year. The tax owing is due two months after the fiscal year-end (three months for eligible small businesses).
GST/HST: If you are registered for GST/HST, you must file these returns either annually, quarterly, or monthly, depending on your business’s annual sales.
PST: If you are required to collect PST – this is typically a monthly or quarterly filing schedule.
Payroll Remittances: If you have employees, you must remit payroll deductions to the CRA on a regular basis, either bi-weekly, monthly or quarterly.
- Working with a Professional
Taxes can get complicated, especially as your business grows. While it may seem like an added expense, working with an accountant and bookkeeper can save you time and stress and even money down the line. An experienced professional can help you identify all eligible deductions, credits, and tax-saving opportunities, ensuring you comply with the CRA’s rules. - Staying Updated on Tax Rules
Tax rules and rates can change from year to year. For example, corporate tax rates or GST/HST rules may be updated in the federal budget. It’s important to stay informed about changes that might affect your business. The CRA website is a great resource for the latest information, or you can subscribe to tax newsletters or consult with your accountant regularly.
As a new business owner in Canada, understanding taxes can help you avoid headaches and make the most of tax-saving opportunities. From knowing the different types of taxes to keeping accurate records and filing on time, these tips will help you manage your business taxes with confidence.