If you are considering starting your own business, now is certainly an exciting time to be joining the hundreds of thousands of Canadians who are currently business owners. One of the first steps is deciding how you want to run your business and understanding the accounts you’ll need to set up. Today’s blog will cover a few important choices you’re going to have to make!
Deciding on a Legal Structure
Before we begin discussing tax accounts, you’ll need to choose a legal structure for your business; make sure to get properly informed on the various options. There are many ways to structure your business — the two most common are as a sole proprietor or as an incorporated business.
Sole Proprietor: As a sole proprietor, you are your business, from a tax point of view. Business income/expenses are reported on your personal income tax return; there is no ability to defer income tax. If your company loses money, those losses can typically be used as deductions against your other sources of income (i.e. you get a tax refund). Note that there are rules to follow here, so make sure you know what they are. (The rules are too lengthy to describe here.)
Incorporated business: As an incorporated business, you and your business are two separate legal entities. This results in a variety of distinctions, two of the most important ones being that you have to file a separate tax return for the company, and that you add a legal buffer between you and the work your company does. As your business earns money, you may leave money in the business or take the additional funds as salary or a dividend. (See our blog on dividends vs. salary.) Any business losses remain in the company to offset future earnings, but if you never earn a profit, these losses are ‘trapped’ in the company.
Your next crucial step is an easy one. Regardless of whether you choose to operate as a sole proprietor or as an incorporated entity, you will need a Business Number (which operates like a social insurance number for your business). You can get one easily by phoning the CRA (1.800.959.5525). Make sure you have your business name, address, nature of your business, account types (which we will discuss below), phone number and Articles of Incorporation (if applicable) in front of you before you call. Want to double check you have everything you need before you call the CRA? Set up a time with Kent Accounting so we can ensure you’re completely prepared.
Almost every business requires a GST number, although there are a few exceptions. Unfortunately, the rules are quite complicated so it’s hard to give simple pointers here — you’ll need to either read the rules or contact a professional. To find out whether your business needs a GST number, call Kent Accounting and book a consultation. As a rule of thumb, you are required to collect GST once your business makes $30,000 worth of sales in a single year, and since many new business operators don’t know how much they will make or when, it is best practice to register for a GST number as soon as you begin operations. At the time of this blog post, Alberta has GST and not PST/HST. However, other provinces have PST and HST; if you plan to sell in other provinces, ensure you understand the rules on collecting and remitting. Like any federal tax, GST returns must be filed annually. Filing deadlines depend on when you register for your GST number and what revenue volume you anticipate. If you fail to file your return and make the GST payment on time, it will cost you interest and penalties.
Corporate Income Tax Account
This applies to those small business owners who have decided to incorporate their business. As you’ll be filing a separate annual tax return for your business, it will need its own income tax number, and these taxes must be filed both provincially and federally. Your corporate income taxes are due within six months of your fiscal year end, and a failure to file and pay can flag you for an audit.
Payroll Tax Account
Issuing payroll cheques has taxation requirements, starting with registering for a payroll account. Registering for your payroll account (or closing your payroll account) is as simple as contacting the CRA, and we suggest registering before you hire any employees, so it is ready to go when you start bringing on staff.
A word of caution: be organized with payroll. If you don’t know what you’re doing, STOP and either read the rules or contact a professional. The CRA is very punitive with payroll errors and/or late remittances; it is common to incur financial penalties as a result. One point we cannot stress enough is to not to be late with your remittance — payroll withholdings are the CRA’s money, and they want it in a timely fashion. Remittances are generally due on the 15th of the month, following the payroll payment. If your payroll exceeds certain thresholds, the remitting frequency will be accelerated. The first time you are late with a payment, it’s a 10% penalty. The second offense is a 20% penalty. If your payment is due on the 15th and you make it on the 16th, it’s considered late, and the CRA will not ‘give you a break.’ Finally, payroll accounts require that you issue T4s to all your staff. If payroll seems overwhelming, contact Kent Accounting to find out more about our payroll services.
If your business includes importing and exporting goods across the border, then you’ll need to set up an Import/Export Account. If you are planning on using a customs broker, you might not need an Import/Export Account. Not all goods are allowed into Canada, so make sure you determine their eligibility before putting significant efforts into your business. And finally, there are duties and tariffs associated with importing and exporting goods — know the tariffs and duties before you get started. Failure to adequately consider these costs in your pricing could cause real challenges.
Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.