I’m often approached by people who want to start a business. Starting your own business (or buying one) can be very rewarding, but also quite daunting. What should you know and where do you start? In Part One, I focused on the business considerations. Part Two will focus on the common tax considerations.
Should I register my business with CRA?
If you’re operating as a sole proprietorship, you don’t necessarily need a business number. However, you will need one if your annual taxable income will be greater than $30,000. All profit-oriented businesses should register with CRA to obtain a business number. Your business number will enable you to file your annual tax return. You will also need it to register for the different tax programs (e.g. GST or payroll). You should only register for the accounts you will need. For example, if you don’t have any payroll payments, then don’t register for the payroll program.
How do I register my business with CRA?
You have three options to register your business with CRA. First, you can use CRAs form RC1 to register (you can access it here). Once completed, mail the form to CRA. After your business is registered, CRA will send you a letter confirming your business number, and all the programs you registered for. Second, you can use CRAs Business Registration Online service (you can access the service here). The service provides a helpful overview of the registration process, the eligibility criteria, and any information you need to gather before starting the registration process. Lastly, you may also contact Oikonomos or another tax services provider to register the business on your behalf.
BONUS TIP: CRA will allocate a December 31 year-end to your business by default. Speak to your tax accountant before registering, to ensure you register with the year-end you actually intend to use for your business.
When do I need to register for GST?
GST is applied to the sale of services or products that are defined as “taxable supplies” by CRA. Most services or products sold in Canada are taxable supplies. If you are not certain, you should contact an accountant for advice. If your total taxable supplies in any rolling four quarter period will exceed $30,000, then you must register your business for GST. Keep a running total of your sales by calendar quarter. Once you hit the $30,000 mark, you are no longer considered a small supplier and must register for GST within 29 days following the quarter-end.
BONUS TIP: Even if your sales are below $30,000, you may voluntarily register for GST. Consumers are used to paying GST on items, so this shouldn’t scare off your customers. However, once you are registered, you will be able to claim back the GST you pay on any services or products you buy for your business.
What should the year-end of my business be?
The tax year-end of a sole proprietorship is generally the calendar year-end. You may use form T1139 to request a different year-end. This, however, requires that you add an estimate of your income for the remainder of the calendar year, and deduct the estimate you made in the prior year. For this reason, we generally do not advise this route, due to the unnecessary work involved, with no real tax benefit being achieved.
A partnership may elect to use a non-calendar year-end, provided it does not have a partner who is a professional corporation carrying on the business of an accounting, medical (e.g. dentist, doctor, veterinarian) or a legal professional (e.g. lawyer, notary), or another partnership which is subject to this same rule. Non-professional partnerships are free to choose any year-end, while professional partnerships must have a calendar year-end.
A corporation may choose any year-end.
Assuming that you can choose your year-end, you should consider the following:
- Given your business cycle or family schedule, what time of year will you have the time to devote to finish the year-end accounting?
- If you don’t make installment payments, and have difficulty saving throughout the year for your corporate tax and GST obligations, when are you likely to have the cash reserves available to make the necessary payments?
Once you have considered these, it is also helpful to point out that a non-calendar year-end provides you with the maximum number of tax deferral planning strategies, while a year-end that falls between July and November maximizes the length of those deferral options from year to year.
What expenses can I deduct for tax purposes?
CRA specifically states that “you can deduct any reasonable current expense paid or will have to pay to earn business income”. Let’s evaluate that definition. It must be a current expense, meaning it can’t be something you incurred in a prior year, or before being incorporated, nor an expense that might occur in the future (e.g. the repair of a vehicle). If you have incurred the expense, but haven’t yet paid for it, it is still deductible (e.g. you are billed at the end of the month for your telephone usage and only pay it in the next month). The last part of the CRA definition is “reasonable”. Reasonable is a subjective measure, and more difficult to pin down. An example of unreasonable would be if you paid your spouse a rate much higher than market rate to perform a specific task (e.g. you pay your spouse $150,000 to be the office manager when the market rate is $60,000). The non-reasonable portion will be disallowed by CRA, effectively resulting in double taxation.
CRA provides a good summary of the various operating expenses you may deduct here. You may also deduct your cost of sales (e.g. the cost of items purchased and resold, the cost of items manufactured, import duties, and more).
How will I get paid from the business?
If you are a sole proprietor, all the income is attributed to you and taxed in full. So, you can use it at any time. As a partner of a partnership, the net income of the partnership is assigned to the partners each fiscal year. At that time, it becomes taxable income for each partner, and can therefore be used as you see fit. It should be noted that in a partnership, the income allocation throughout the year will generally be determined by all the partners, and is normally documented.
Taking money from a corporation has more options. First, you can pay yourself a monthly salary, and should then remit the payroll tax deductions throughout the year. Second, you may withdraw funds during the year, but not declare it as a salary. You would then declare the income once a year as a dividend, annual salary, or bonus. The tax on the salary should be calculated and remitted to CRA. For a bonus, the tax needs to be calculated and remitted to CRA within 180 days of the corporation’s year-end.
How much money to take from your corporation is a personal decision and should be made after careful consideration of your personal cash flow needs. The more money you can leave in the corporation, the better. Income in a qualifying small business corporation is generally taxed at about half the rate of personal income, even at modest income levels. This deferral of your personal tax obligations allows you to invest the income and plan how you will withdraw the funds over time, resulting in a reduction of your overall tax rate. Once you have determined your minimum personal cash flow needs, you should speak to an accountant to plan your tax obligations and to obtain guidance on how best to utilize the excess cash retained in the corporation.