Finally you are starting your business. Here is a quick Tax and Accounting checklist for Canadians.
Incorporation vs Sole Proprietorship
There is a large amount of information and resources about the pros and cons of incorporation vs sole proprietorship on the internet. You can do your own research and determine which way is best for you. In short, incorporation will involve more costs and administration but offer protection against liability. Incorporation also allows more tax planning opportunities as your business grows.
If you are starting up something small or as a side hustle, running the business as a sole proprietor will generally make more sense.
If you expect to hire employees, sign leases, enter into contracts, protect your business name, or have more than one founder, incorporation will be a better option.
CRA Business Number Registration
If you incorporate your business provincially (except in Quebec, and Newfoundland and Labrador), you will automatically be assigned your 9-digit CRA business number. The business number is needed to file corporation income tax, GST/HST, payroll deductions, import-export and administer other CRA programs.
If you are a sole proprietor, the CRA business number is optional. It’s free to register via Business Registration Online (BRO).
Sometimes your business has more than one founder, but you do not want to incorporate. You can then register the business as a partnership which can also be done via BRO.
GST/HST
Unless the goods or services you provide are exempted, you are required to register for GST/HST if your sales exceed $30,000 in a calendar quarter. You will start to charge GST/HST to your customers but at the same time, you can claim Input Tax Credit on the GST/HST you paid for goods and services to reduce your GST/HST payable.
Registration for GST/HST can be done on BRO. You must have a CRA business number to register. You will get a Registration Confirmation Notice with information about your filing requirements. For small businesses, the filing requirement is usually annual and is due three months after your year end.
In BC, the GST rate is 5%. You need to keep records of the GST you charge and the GST you pay (see the bookkeeping section below). The filing is done electronically via CRA My Business Account or GST Netfile. If you charge more GST than you pay, you need to remit the balance to CRA. On the other hand, if you pay more GST than you charge, you get a refund.
Provincial Sales Tax (PST)
Each province has their own provincial sales tax. If you are in BC, you can visit this website to find out more: Find out if your business is required to register to collect PST
Unlike GST/HST, there is no Input Tax Credit. Even if you charge your customers PST, you do not claim a credit for the PST you pay. PST you pay will always be an expense to your business.
CRA My Business Account
Registration for a CRA My Business Account is not mandatory but highly recommended as it provides you online access to everything you need to know about your taxes. If you want your accountant to handle taxes for you, having a My Business Account and authorizing them as your representative will save your accountant a lot of time which in turn saves you accounting fees.
CRA Payroll Account
Once you start to pay yourself a salary or hire employees, you are required to register for a CRA payroll account. You can do so via BRO. You will need to withhold income tax, CPP and EI from each pay cheque and remit promptly to CRA. Failure or late to remit is subject to hefty penalties. You will also need to issue T4s each year.
Payroll administration is a big topic, and I will have a separate blog about it.
WCB
Each province has its own Worker’s Compensation Board. Once you hire workers such as employees, subcontractors, or casual workers, you must apply for coverage. In BC, you do this with WorksafeBC. You are required to pay your premium annually or quarterly depending on the size of your workforce. Premium is calculated as a percentage of your payroll. Your rate is determined by your industry and your company’s claim history.
Employer Health Tax
In BC, once your payroll exceeds $500,000, you are required to pay Employer Health Tax. Visit the Ministry of Finance website to learn more about it. For Ontario, visit: Ontario EHT
Business Bank Account and Credit Card
You should separate your personal finances from business finances. The easiest way is to open a business bank account and a business credit card.
Bookkeeping
Bookkeeping is the process of recording your business’s financial transactions into organized accounts. For example, the sales you generate are recorded into the revenue accounts, and expenses are properly categorized into the expense accounts. If you collect sale taxes (GST/HST/PST), you also split out the amount of the taxes for proper filing and remittance.
Popular accounting software for small businesses includes QuickBooks, FreshBooks, Wave, Xero, Sage 50 etc. Most of the processes can be automated such as linking bank accounts and credit cards for live updates, setting up rules to categorize transactions automatically, and using apps with optical character recognition (OCR) to capture invoices and receipts for data import. The software will also capture the amount for sales tax and payroll tax filings.
Some businesses with simple transactions can still use spreadsheets to record their business transactions. You can also do manual bookkeeping and buy accounting journals from stationery retailers such as Staples.
Your bookkeeping will form the basis for all the tax filings.
Bookkeeping vs Accounting
These two words are sometimes used interchangeably but they refer to two different processes. Bookkeeping is the process of recording transactions including purchases, receipts, sales, and payments. A bookkeeper will also do payroll and reconcile bank accounts.
An accountant will analyze the data from the bookkeeping records, perform adjusting entries, and ensure the financial records are following accounting guidelines and standards. An accountant will also provide business owners with financial statements and reports, prepare budgets and forecasts, perform audits or reviews, and ensure compliance with CRA and other government authorities.
An accountant can be a bookkeeper, but a bookkeeper cannot be an accountant without the proper training and certification. In Canada, Chartered Professional Accountants of Canada (CPA Canada) is the national organization representing the accounting profession with regional accounting bodies in each province.
What expenses can be deducted?
As a general rule, any expenses you incur to earn income from your activities can be deductible if they are reasonable and supported by proper documentation such as invoices, receipts, and contracts.
You can read a list of common expenses on CRA website here: Business Expenses
Income Tax Filing
Sole proprietors file taxes by reporting their business income on form T2125 on their T1 Personal Tax Return. Tax year is the calendar year. The filing deadline is June 15.
Corporations file their corporate income tax returns T2 within six months after the fiscal year end. The corporation can choose any date for its first year-end, provided that it does not exceed 53 weeks after incorporation. It is worth noting that any tax payable is due 2 months after the fiscal year. Tax payment due date is extended to 3 months for Canadian Controlled Private Corporations (CCPC) with a business income of less than $500,000.
You can file your own T1 or T2 but it is generally advisable to get professional help from a tax preparer.
I hope the above gives you an overview about taxes and accounting when you start a business in Canada.
