Small businesses play an important role in the Canadian economy, accounting for approximately 97.9% of all employer businesses and 8.3 million jobs in the country. As a small business owner in Canada, understanding the tax requirements can be overwhelming. In this blog post, we will explore the tax requirements for small businesses in Canada and provide some helpful tips to ensure compliance.
Types of Business Structures
Before we dive into the tax requirements, you need to understand the different types of business structures in Canada. The most common types are sole proprietorship, partnership, and corporation. Each structure has its own set of tax rules and regulations, and it is important to choose the one that best suits your business needs.
A sole proprietorship is the simplest form of business structure, where an individual owns and operates the business. As a sole proprietor, you are personally responsible for all aspects of the business, including taxes. The income earned from the business is reported on the owner’s personal income tax return.
A partnership is formed when two or more individuals decide to carry on a business together. Each partner contributes to the business’s success and shares in the profits and losses. A partnership is not a taxable entity, and each partner is responsible for reporting their share of the partnership income on their personal income tax return.
A corporation is a separate legal entity from its owners, and the corporation is responsible for paying taxes on its profits. The shareholders of the corporation are not personally liable for the corporation’s debts or obligations. As a shareholder, you are taxed on any dividends you receive from the corporation.
Tax Requirements for Small Businesses
Now that we have a basic understanding of the different business structures let’s take a closer look at the tax requirements for small businesses in Canada.
As a small business owner, the first thing you need to do is apply for a Business Number (BN) from the Canada Revenue Agency (CRA). A BN is a unique nine-digit number that identifies your business for tax purposes. You can apply for a BN online through the CRA website, and it is free of charge. You can follow the prompts here.
You may be required to register for the Goods and Services Tax (GST) or Harmonized Sales Tax (HST). GST is a federal tax, while HST is a combination of federal and provincial taxes. The current GST rate is 5%, and the HST rate varies depending on the province or territory in which your business is located.
If your business’s total annual revenue is less than $30,000, you do not have to register for GST/HST. However, if your revenue exceeds $30,000, you must register for GST/HST and start collecting and remitting the tax. It is essential to keep accurate records of all your sales and expenses, as you will need to report this information on your GST/HST return. Once you registered you basically just need to add that amount to every invoice, but the good news is that you’ll likely be able to get back(as a refund) the HST you pay on your expenses now as what’s called a Income Tax Credit(ITC). When you register your BN, if you need to register for GST/HST you should just do it at the same time.
If your business is incorporated, it is a separate legal entity and must file a separate tax return. The corporate tax rate is currently ~15% for most businesses. Technically it’s closer to 38%, but basically everyone gets a 10% reduction(Federal tax abatement) then everyone also gets another 13% reduction(General Tax Reduction), so we’re down to 15%. You’ve also got the Small Business Deduction on income below $500,000. It’s a bit more complicated than it seems, is the point. With a corporation, you’ll now need to keep track and report a Balance Sheet when you file your taxes, so it’s a lot more work in your record keeping.
If your business has employees, you must deduct and remit payroll taxes, such as Canada Pension Plan (CPP), Employment Insurance (EI), and income tax, from their paycheques. You must also contribute to these programs as the employer. When you get your BN, you should just register a payroll account at the same time if you’ll be hiring people in the short term.
In addition to deducting and remitting payroll taxes, you must also file a T4 slip for each employee at the end of the year, which reports their total income and deductions for the year.
When you get your BN, you’ll have a HST/GST Number and a Payroll Number that are very similar. For example if you get your BN 123456789, your HST/GST number will be 123456789 RT0001 and your payroll number will be 123456789 RP0001.
This should get you started on the tax requirements for small businesses in Canada. Then you hire a good tax accountant like Zenbooks to file your annual taxes!