The information in this article is for educational and information purposes only and should not be relied upon for decision making. Always seek the expertise of a professional advisor or accountant prior to making any decisions.
Tax time can be intimidating for startups, especially if it’s your first business and you haven’t been through it before. In this article, Tom shares key information to help demystify the process and highlights the important steps entrepreneurs should take to plan for tax season.
Q: I’ve started my business in the last year, what do I need to file for my taxes and when do I need to do it?
Even if you’re using a professional, it’s good for business owners to have an idea of the major things to keep in mind for taxes. Below are some key questions to ask yourself and steps you can take to be better prepared for tax time.
What Kind of Business are You Running?
An important first determination you have to make is what kind of legal form does your business take. You might have a sole proprietorship, a partnership, or a corporation. Depending on which you have, the tax deadlines and requirements are different. The CRA has helpful definitions for each type of business but in short:
- If you have not incorporated your business and are the only business owner then you are likely a sole proprietor.
- If you have not incorporated your business and you are a partner in the business with somebody then you are likely in a partnership situation.
- If you have incorporated your business then you are a corporation.
Key Differences of Business Legal Forms
Sole Proprietors must file and pay their taxes on the same T1 return as their personal income taxes. The difference is that you must fill out an additional form such as a T2125 – Statement of Business or Professional Activities in addition to your regular T1 forms. The good news is that you have until June 15 to file your personal and business tax return which is a little longer than if you didn’t have a business. The bad news is that if you owe money, you still have to have it completely paid by April 30, which is a little counter intuitive. The practical result of this is that unless you are certain that you don’t owe money for the year, then you are best to get your tax return done before April 30.
Partnerships are similar to a sole proprietorship in that there is no separate partnership tax return filed. Each partner includes their percentage of income and expense as part of their personal tax return using forms such as the T2125 – Statement of Business or Professional Activities. You may also need to file a T5013 partnership information return. The due dates are the same as for sole proprietorship except for the T5013 which is due by the end of March usually.
Corporations are the most unique because they are considered a separate legal entity from you and therefore require a separate tax return called a T2. You’d know if you are incorporated because there are forms to fill out and fees to pay and often you’ll need to get legal advice so it’s not something you can just fall into unknowingly. Corporations are taxed based on their fiscal year which can be different from the calendar year and they must file their taxes no later than six months after the end of their fiscal year.
There are, of course, other tax season requirements for businesses besides filing and paying their income taxes and these are most overlooked because you don’t know what you don’t know. Here are some of the top issues to keep on your radar around tax time to avoid trouble.
Ensuring Your Business is Registered
Corporations always need to be registered but sole proprietorships and partnerships may only need to register if you are required to for HST/GST purposes, payroll accounts, or import/export accounts. The CRA has a guide available if you want to dig deeper.
- Payroll Filing
Hiring your first employee is a big step and comes with a host of responsibilities for yourself as the employer. Aside from the HR, you are required to have your employees’ social insurance number (SIN) and TD1 forms, register for a payroll remittance account, and start calculating and remitting the employee’s and employer’s share of taxes. Software such as QuickBooks will include payroll packages to make this easier, or you can outsource the task completely to the many payroll service providers out there. Finally, you are responsible as the employer for providing your employees with pay stubs and with a T4 at the end of the year and reporting all employees’ income to CRA by the end of February.
- HST/GST Filing
Provinces that have a separate provincial sales tax rather than HST will have their own provincial filing requirements, so be sure to check with your provincial ministry of finance. On the Federal side, you need to register for an HST/GST account when your sales exceed a certain threshold, which put simply is $30,000 in a quarter. Once registered for HST/GST, you will likely need to charge HST/GST and remit installment payments which can vary in frequency from monthly to yearly and you will also need to file your yearly HST return and pay any balance owing based on your actual HST/GST collected in the tax year.
- Keeping Records
As the business owner, keeping records is an important responsibility that you have. Put simply, you must keep a record of anything to support a sale (income) or expense (cost) for your business. You must keep your records for six years after the end of the tax year unless you get permission to destroy them from the CRA. There is of course a lot of detail available about the records that must be kept and also about electronic records requirements. At year end it’s particularly important to ensure that you capture and record all the transactions that occur in the correct tax year. This means you’ll want to do inventory counts, ensure all your expenses for the tax year are entered, ensure all your invoices are issued, and make sure you’ve calculated a depreciation (capital cost allowance in CRA terms) for any capital assets you may have. All of these accounting transactions make a difference to what you have to report on your tax return and shouldn’t be skipped.
Get Help if You Need It!
If all this seems intimidating or too daunting then don’t be afraid to get help. Unfortunately, if you miss key deadlines, make errors or don’t remit taxes when you are supposed to, then the CRA is not very forgiving and you may face fines or interest charges. Getting the help from an experienced professional and using accounting software such as TurboTax and QuickBooks can go a long way to saving you time, stress, and often, money.