Canada: New Business Tool Kit Chapter 6 – Income Taxes

Income tax laws are extensive and can be confusing for an individual starting a business. This chapter does not cover all the tax ramifications of a new business; however, it provides some guidance on complying with the laws.  An accountant or tax lawyer should be consulted when you are dealing with income taxes.  Income taxes have a direct and potentially significant impact on the cash flow of your business.

INCOME TAX FORMS

Each type of legal entity is required to file a different type of income tax form.

  1. Corporation. A corporation is considered a taxable entity and is required to file a federal Form T2 and possibly a provincial tax return.
  2. Partnership. A partnership is not a taxable entity. It is treated as a conduit through which taxable income is passed to the individual partners for inclusion in their respective tax returns. A partnership may be required to file a T5013 Partnership Information return. A partnership is required to file a return if:

(a) at the end of the fiscal period, the Partnership has revenue plus expenses of more than $2 Million, or

(b) has more than $5 Million in assets, or

(c) the partnership has a corporation, trust or another Partnership as a partner

  1. Sole Proprietorship. A sole proprietorship is considered to be a component of the individual's personal T1 tax return. The tax form required is the T2125.

ALLOWABLE BUSINESS DEDUCTIONS

As a rule, you can deduct any reasonable current expense you paid or will have to pay to earn business income. The expenses you can deduct include any GST/HST you incur on these expenses less the amount of any input tax credit claimed. Some common deductions are as follows:

  • Advertising
  • Bad debts
  • Business start-up costs
  • Business tax, fees, licenses, dues, memberships, and subscriptions
  • Business-use-of-home expenses
  • Capital cost allowance
  • Delivery, freight, and express
  • Fuel costs
  • Insurance
  • Interest
  • Legal, accounting, and other professional fees
  • Maintenance and repairs
  • Management and administration fees
  • Meals and entertainment (allowable part only)
  • Motor vehicle expenses
  • Office expenses
  • Property taxes
  • Rent
  • Salaries, wages, and benefits (including employer's contributions)
  • Supplies
  • Telephone and utilities
  • Travel

More specific information can be found on the CRA website.

INSTALMENTS

In addition to the regular tax forms, the law requires that, if an estimate of the tax is not properly prepaid on a quarterly basis (individuals), or monthly (corporations), a non-deductible underpayment penalty will be levied.  Since an estimate is based on forecasting the future and is liable to human error, the tax laws provide two safe harbors to avoid the penalty for underpayment based upon prior years' taxes and other criteria.

Estimates are filed using the following forms:

  • Corporate Remittance form T7DR
  • Individual Remittance form INNS3

DUE DATES

The due dates of the various forms are:

  1. Corporate: Form T2 is due no later than six months following the company's fiscal year-end. Generally, the tax payable must be paid by the last day of the third month after the year-end.
  2. Sole Proprietorship: Income from a sole proprietorship or a partnership is to be included in the personal tax return of the individual for the calendar year. The T1 personal tax return must be filed by June 15 and taxes owing paid by April 30 of each year.
  3. Partnership: If required to file a return and throughout the year all the members of the partnership are individuals, you have to file your Partnership Information Return no later than March 31 after the calendar year in which the fiscal period of the partnership ended. If all the members of the partnership are corporations, you have to file your Partnership Information Return no later than five months after the end of the partnership's fiscal period.

In all other cases, including if the members of the Partnership are a combination of individuals and corporations, you have to file your Partnership Return no later than the earlier of:

(a) March 31 after the calendar year in which the fiscal period of the Partnership ended; or

(b) The day that is five months after the end of the Partnership's fiscal period.

TAX PLANNING

Proper tax planning is essential in order to make the most of the income tax laws.  You will probably need to develop a relationship with a qualified professional who has experience with the taxation of your type of business.  Tax planning is not a one-time shot right before the return is due.  Tax planning is a year round endeavor requiring communication on both sides of you and your accountant. Proper planning ensures that there are no surprises when the return is filed.

PROVINCIAL AND FOREIGN TAXES

If your company will be doing business in more than one province or country, it is essential that you familiarize yourself with the tax laws and filing requirements of those jurisdictions as each has its own rules and regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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