Accounting 101 for entrepreneurs - part 2

It is important for your business to comply with tax regulations. Here is a brief walk-through of basic tax matters to ensure your business stays tax-compliant.

There are different types of tax accounts with the Canada Revenue Agency (CRA) for a business, including, but not limited to:

  • GST/HST
  • payroll withholding taxes 
  • business income tax

For an incorporated business, the account refers to the corporate tax account. For an unincorporated business, the corporate tax account is not applicable because business income is filed through the form T2125 together with the owner’s personal tax return.

As a Canadian business owner, you should set up applicable tax accounts with the CRA; ensure that you collect, withhold, and remit the appropriate amount of taxes; and file tax returns on time to avoid interest and penalties. Non-compliance may result in significant consequences.

Goods and Services Tax (GST) / Harmonized Sales Tax (HST)

For GST/HST compliance, a business with annual sales of over $30,000 must be registered for GST/HST and charge GST/HST on taxable sales of goods and/or services. The amount of GST charged is constant, but the provincial component of HST varies between the provinces. The collected GST/HST must be remitted to the CRA with the GST/HST filings after the permitted deduction for input tax credits (ITC).

There are various exceptions to the general GST/HST principles above depending on the nature of your business, types of sales, and where and to whom the sales are made. It is recommended for your business to seek professional advice on how to correctly charge GST/HST and claim ITCs in order to ensure GST/HST compliance.

The CRA states that the GST/HST remitted to it is net of ITC, which are GST/HST paid or payable on purchases and expenses related to your commercial activities that you can claim.

Deadlines to file and remit GST/HST can be monthly, quarterly or annually, depending on the reporting period you select for your business and/or threshold of taxable sales.

Note that there is no HST in Quebec. The TVQ and GST is charged by the merchant and remitted to the Agence du revenu du Québec which sends the GST portion to the CRA.

Payroll withholding taxes

If you have incorporated your business and/or have employees, you must open a payroll account with the CRA and withhold Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and income taxes from your own, and/or your employees,’ salaries. The withheld amount is also referred to as a source deduction.

Employers are required to contribute an additional portion of CPP and EI as employer contributions. As an employer, it is your obligation to withhold appropriate amounts from the employees’ wages, and to remit them to the CRA.

A T4 slip summarizes an employee’s annual gross employment income, CPP, EI, income taxes withheld and other deductions during a calendar year. The T4 slip is essential in order for each employee to prepare a personal income tax return. Business owners are obligated to issue T4 slips to their employees by the end of February in the calendar year following the year in which they worked for the business, and to file the information slips with the CRA.  Exceptions apply to Quebec where Quebec Pension Plan contributions are withheld.

Business income tax

If you have incorporated your business, you must file your annual corporate income tax return no later than six months after your business’s fiscal year end. In preparing your tax return, you will need to report the balance sheet and income statement information of your business.

Some items on your financial statements may require a different treatment for tax purposes. For example, meals and entertainment expenses are generally 50 per cent deductible; therefore, the remaining 50 per cent will be added back to your business’s accounting income, which increases your net income for tax purposes. Eventually, your accounting net income will be converted into net income for tax purposes through certain adjustments based on a tax schedule.

Note that if your business ends up with a tax balance owing, you should make payment to the CRA no later than three months after the business’s fiscal year-end. Exceptions apply when the company is not a Canadian-Controlled Private Corporation (CCPC) throughout the tax year, or the company did not claim the small business deduction for the current or previous tax year.

If you are the sole proprietor of your business, your business income and expenses need to be filed with your personal tax return no later than June 15 of the following year. However, any tax amounts owing are due on April 30 of that year, as with any other individual taxpayer.

You should keep all the receipts and supporting documents for the income/expenses reported for at least six years so you are prepared for a potential tax audit by the CRA. 

Further compliance with applicable provincial regulations will be required. It is highly recommended that you consult with a professional accountant about your business to ensure that you remain tax-compliant.

Keep the conversation going

Have you heard the horror stories about what can happen to a business that isn’t tax compliant?  Are you getting professional advice, and are you devoting enough time and energy to this essential aspect of your business?  Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada. This article is provided for information purposes only and does not constitute an offer or solicitation to buy. The information contained in this article is believed to be reliable, but cannot be guaranteed. Readers are urged to obtain professional advice before acting on the basis of material contained in this article.

About the Author

Calvin Wang, CPA, CA, MA

Calvin is a senior associate working in the Audit and Assurance Department at Fuller Landau LLP, a mid-sized accounting, tax and advisory firm with offices in Toronto and Hamilton, Ontario. Calvin has experience servicing private companies and not-for-profit organizations. He is also a facilitator and sessional leader for the CPA Professional Education Program. Calvin enjoys volunteering and studying aviation.