Tax Compliance
- Owning and operating a business in Canada means you have some legal responsibilities.
- CRA requires regular reporting of Canadian sales tax, payroll taxes, and income taxes.
- Each province and territory has their own tax related requirements as well.
- These regulations are often referred to as government compliance requirements.
- Tax compliance returns and payments should be filed on time.
- Failure to report and remit by due date leads to costly penalties and interest charges
Inactive Corporations Have to File Too
- All corporations operating in Canada have to file a T2 corporate tax return each year.
- Even if you did absolutely nothing with your corporation all year, it still exists.
- Until a corporation is to formally dissolve it carries on and must file tax every year.
Corporate Structure Take steps to protect your business assets
If you own assets, such as real estate that you use in your business consider separating their ownership from your business operations by placing those assets in a holding company to protect them from creditors of the business. Also, if you have excess cash in your corporation, consider paying those amounts as dividends to a holding company and then lending the funds back on a secured basis if needed in the business operations. This will give your holding company a claim on the assets of the business, protecting those assets from third parties.
Business expenses……General Rule
Claim any reasonable current expense you paid to earn business income. Purchases & business expenses must be substantiated with a sale invoice, agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure.
Salary or Dividends? How Do I Pay Myself? Employment Insurance (EI)
- Employment Insurance (EI) premiums can constitute a considerable expense.
- There are various exemptions from having to remit EI premiums.
- For example, if you own more than 40% of the voting shares of a corporation, your employment is not subject to EI premiums.
Pay salaries to family members
If a family member has provided services to your business, consider paying them reasonable salaries or bonuses before year-end if they will pay less tax than you or your business. So, your business can claim a deduction and there may be little or no tax owing by your family member. This strategy will also provide income to your family member to create RRSP contribution room, allow for child care deductions, and make contributions to the Canada Pension Plan if the hope is to collect CPP later.
Director’s fees
If your spouse and/or other family members are directors of your corporation, consider paying them a director’s fee for services performed. Such services usually include attending directors¡¯ meetings, directing the management and affairs of the business, approving financial statements, declaring dividends, etc.
When salaries are considered reasonable?
As a rule, salaries are considered reasonable if they are representative of an amount that would be paid to an arm¡¯s-length party for similar services, in other words, comparable to what you would pay an unrelated employee to do the same job.
Time the purchase & sale of capital assets
If purchasing capital assets, consider doing so, & putting those assets to use, before your business year-end to begin claiming capital cost allowance (CCA) sooner. If selling capital assets, consider delaying the sale until after year-end to claim CCA for one additional year.
Capital Cost Allowance (CCA) – Depreciation Expense
CCA is the tax deduction for depreciable property such as furniture, equipment or even buildings.
The cost is deducted over a period of years, through a CCA claim.You don’t have to claim CCA in the year that it occurs – as tax strategy you can use CCA to reduce your income tax. The CCA is not a mandatory tax deduction so you can use as much or as little of your CCA claim in a particular tax year as you wish; you can carry any unused portion forward to help offset a larger income tax bill in the future.
It doesn’t make sense for you to take your full CCA claim deduction in a year that you have little or no taxable income.
Business-use-of-home – for Self-employed
Generally, you can deduct expenses for the business use of a work space in your home as long as:
- The work space is your principal place of business; or
- you use the space only to earn your business income & you use it on a regular and ongoing basis to meet your clients, customers, or patients
Business-Use-of-Home Expenses What to deduct?
- Mortgage interest, property taxes and/or rent,
- Heat
- Lights
- Water
- Maintenance
- Cleaning materials
- Telephone
- Internet connection
Claim depreciation on the portion of your home
In general, it¡¯s not a good idea to claim depreciation on the portion of your home used for business purposes, since there may be negative tax implications if you ever sell your home. If you do not claim depreciation, your entire house may be regarded as your principal residence and any gain realized on its eventual sale may be tax-free.
Income Tax Installments
Corporations are required to make instalments if the total tax liability for the current and preceding taxation year is $3,000 or more. CRA will charge non-deductible interest on the underpayments.
Manage your installment payments
You may be sending too much money to the CRA. If your income is falling and you’re making installment payments based on last year’s income, there may be an opportunity to reduce those installments or perhaps even stop making them.
