It's no secret that April comes with a lot of tax-related anxiety—especially if you’re filing taxes differently than usual. For those of you who started your own small business in 2018, there are probably a lot of big questions you’re muddling through. We're here to help you answer some of them.
Disclaimer: while these tips are designed to give a person starting up a few tips as to how to proceed, this is not a full list, and the tax treatment required for each business is different. Please consult a tax professional should you require additional information.
What Types of Business Am I?
For a start-up business, there are typically three types of businesses you can form: a proprietorship, a partnership or a corporation. Proprietorships and partnerships are almost the same, except a proprietorship has one owner while a partnership has more than one. These types of business are an extension of you as an individual or individuals, which means you are fully liable personally for the business. On the upside, proprietorships are normally cheaper in terms of annual filing fees, tax returns and the legal documents you require to establish the business.
A corporation on the other hand is a company, separate from yourself. A corporation has an advantage in that it might (but not always) shield you from personal liability for the business. However, a separate tax return, separate legal papers, and separate annual filing need to take place. You need to consider whether that reduction in personal liability is worth the cost of the corporation.
Am I a Business?
Not everyone who believes they are a contractor, and therefore a business, is actually a business at all! If you have a corporation and are in effect doing the work of a standard employee, you may be subject to the provisions of the Personal Services Business.
Also, if you are a proprietor or partner, you still might be a deemed employee. You need to consider things such as the level of control your payer has over the contract, who provides the tools of the trade to perform the work, whether you can hire sub-contractors, the degree of financial risk you are taking and your ability to profit.
If this has you scratching your head a bit, we suggest visiting Canada Revenue Agency's factors to consider for more information.
What Tax Deadlines Should I Be Aware Of?
For a proprietorship, your net income from your business has to be added to your personal tax return (T1) that you file every year. As a small business owner, you have an extension until June 15 to file your T1, however, the interest on what you owe starts accumulating on April 30. To reduce or avoid paying interest, you should pay an estimate of any balance owing to the CRA before April 30.
For a partnership, the partnership will file a T-5013, and each individual’s portion needs to be included on their T1. The same deadlines as a proprietorship apply. In most cases, you must file your T-5013 by March 31.
For a corporation, the corporate income is not included on your T1, only the salary, dividends and any other benefits you receive from the corporation are included on that. You must file a T-2 tax return for the corporation within 6 months of the corporate year end (which is a date selected by the corporation).
The T4 return for the salaries you pay your employees is due by February 28 each year. Also, for most small businesses, you need to remit the source deductions (CPP, EI, Income Tax) to the CRA by the 15th of each month.
Be aware that once you have completed your first year of business, the CRA may require you to make income tax instalments based on the amount they estimate you will owe for the following year. Make sure to pay those instalment payments, unless your income drops significantly, to avoid interest and penalties.
As a small business owner, you also need to manage your cash flow so that you have enough cash when these tax filings are due to pay the CRA and Sask Finance.
Most small business have to file GST on a yearly basis three months after the end of the fiscal year (in most cases, March 31st), but the CRA can also increase that frequency to quarterly or monthly. PST filings normally occur monthly, but you can request an annual filing if the amount you collect is minimal.
You may have other tax returns you must file depending upon the type of activity your business takes on during the year. Please consult the CRA website to find out more.
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