Just like us, the government likes to be paid throughout the year. This is why we, as businesses and individuals, are required to pay taxes in quarterly instalments and as payroll withholding tax in any given tax year. These quarterly payments and payroll withholding payments effectively estimate what we anticipate we will owe the Canada Revenue Agency (CRA) based on our income projections for the year in progress.
So what happens if there is a discrepancy between the estimated amount and the actual amount owed to the government? How do you calculate the taxes owed to the CRA?
How to Calculate CRA Tax Instalments
At the end of each calendar or fiscal year, we calculate our total income and expenses for that year. We also must determine taxes due on these amounts and file our income tax returns. We reconcile this quantified tax liability against the amount we previously estimated and paid into the CRA. This reconciliation is what allows us to see if we are entitled to a refund, or if in fact, we owe more taxes to the government.
If you owe the Canadian government taxes, the money owed could either come from your business’s income tax returns, or the sales tax returns. Net tax owing refers to the amount you owe the CRA on your tax return.
CRA Payment Instalment Options for Income Taxes
You have three choices when it comes to determining your CRA payment instalments on taxes owed. Whichever option you choose, you do not have to notify the CRA of your choice.
- No Calculation Option: Best suited for those whose income, deductions, and credits stay relatively similar in size from year to year. This amount per instalment is often already calculated by Revenue Canada based on the information you provided the CRA from the most recently assessed tax return.
- Prior Year Option: Best suited for those whose 2020 income, deductions, and credits are similar to their 2019 numbers yet notably different from their 2018 numbers. Determine the amount of each instalment owed using the figures from your 2019 tax year.
- Current Year Option: Best suited for those whose 2020 income, deductions, and credits are significantly different from the numbers in 2019 and 2018. To determine the amount owed per instalment, use the current tax year of 2020, with concurrent net tax owing, and any Canada Pension Plan contributions or employment insurance premiums.
Calculating Sales Tax Owed
If your small business sells taxable goods and services, you could potentially owe sales tax to the Canada Revenue Agency. The net tax is the total amount of sales tax your business owes the CRA over a particular period. To calculate net tax for your quarterly or annual GST/HST returns, you will need to follow these steps:
- Add up all GST/HST your business gained within the relevant accounting period.
- Calculate how much GST/HST your business paid on purchases.
- Subtract the total figure of what you gained versus what you paid.
- The resulting number is your company’s net tax, which should be submitted to the CRA quarterly, or yearly.
For businesses that make over $400,000 in taxable supplies annually, the CRA’s quick method calculator provides a reasonable estimate of its net tax for HST and GST, varying from province to province. The quick method must be applied for a whole year for businesses that opt to use it.
Why Do I Owe Taxes to the Government?
There are various reasons why you might owe the Canadian government additional taxes than what you originally paid as “estimated taxes” owed. As many variables dictate taxes, you must review these variables to find your answer.
Income numbers can change on a yearly basis, depending on the sources of income a person generates annually. These various sources of income often fluctuate over time. For example, your receipt of dividends will fluctuate as the number of shares you own, and company dividend declarations differ from year to year. Additionally, your interest income will vary as your interest-bearing instruments’ dollar amount and the interest rates fluctuate.
Tax return software will typically use your last year’s income to estimate what you owe in taxes for the following year. Suppose your different income sources change and or the amount of income from each source changes that year. In that case, the estimated tax will differ from the actual tax owed.
How to Pay the CRA Taxes Owing
To pay the CRA taxes owed, there are a few different options available to you. You are able to pay your balance owed online or in person.
To pay online, either use your financial institution’s internal services or the CRA’s My Payment service. You can also use a pre-authorized debit. This allows you to set an amount and authorization by the Canada Revenue Agency to withdraw the specific amount from your business’s chequing account. Individuals and companies can also pay by PayPal, credit card, or Interac e-transfer.
Pay In Person
To pay in person, you must visit your Canadian financial institution with your personalized remittance voucher for proper application to your tax account. Otherwise, you can pay your taxes owed using your cash or debit card at any Canada Post outlet across the country. To pay this way, you will need a quick response code that contains your CRA account information.
How Much Money Should I Set Aside for Small Business Taxes?
The general rule for setting aside a lump sum of money for small business taxes should be around 25% and 30% of your income within that tax year. This percentage range should be enough to cover all applicable taxes in Canada, including federal and provincial income tax, and sales tax.
However, this amount will change from year to year depending on your income and tax bracket. Keep an eye on the Canadian income tax rates to ensure the money you set aside is enough to cover your taxes for the year.
What is the Formula for Tax?
The easiest way to calculate your small business’s income taxes in Canada, is subtract deductible expenses from your total income to arrive at the taxable income.
Taxable Income = total revenue – deductible expenses
Once you estimate that number, you can also check your average tax rates by dividing the income tax expenses by the total taxable income.
Average tax rate = Total taxes paid / Total taxable income
Know What You Owe
Proper record keeping management will hold you in good stead when figuring out how much income tax and sales tax you owe the Canadian government. Calculating your business’s net tax can be a straightforward endeavour, as long as you keep accurate sales, revenue, and income records.
The QuickBooks accounting software can assist small businesses with their quarterly and yearly tax estimates for a quick and easy tax reconciliation time. Don’t be caught out by taxes owed next tax season, try it free today!