As a small business owner, you always face what seems like an unnecessarily complicated set of tax rules. To help simplify the process, here are the answers to the top 5 questions you have as a small business owner.
1) “Should I incorporate? It just seems like extra work.”
One of the most common questions I get asked is if incorporating your company makes sense. Generally speaking, it is more of a question of when you should incorporate rather than if you should. However, there is no one universal correct answer to this question; it depends entirely on your personal situation. To help with the decision, evaluate the statements listed below to see if they describe you. If you answer yes to any of them, you should incorporate. Only if none of the statements describe you might it not be beneficial to incorporate.
- You want to mitigate your risk exposure.
- You deal with a lot of suppliers that give you credit.
- You plan on selling your business in the future.
- You have employees or consultants working for your business.
- You already have or plan on making your small business your full time career.
While this list is not exhaustive, it does include the most common situations that a small business owner would face which warrant the benefits of incorporating. The explanation as to why the prevalence of these situations warrant incorporation is easier explained in person by a professional accountant.
2) “Should I be charging my customers HST?”
Everyone is familiar with the burden of Harmonized Sales Tax (HST) as it appears on both personal purchases and purchases from suppliers. What you may not be familiar with is that as a small business owner the burden of HST is not levied onto your business. All the HST you pay to your suppliers as a small business can be received back from the government as something called input tax credits (ITC), in cash. However, there are 2 stipulations to this offer: you will be required to charge HST to your customers and remit those collections to CRA, and you will have to file an annual HST return. The process of registering with CRA is quite simple; simply pick up the phone, call CRA and tell them you want to register for GST/HST.
I always recommend that clients register earlier as opposed to later to gain the benefit of ITCs. While you do have the choice, it is important to note that registering for HST with CRA is mandatory for all small businesses (incorporated or not) with income from Canada over $30,000 per year. If you forget to register in time, CRA could hit you with an arbitrary penalty and you could end up with a payable balance rather than a refund.
3) “What should I set my company’s year-end as?”
Contrary to popular belief, the year-end for your incorporated business does not have to align with that of the calendar year. Many people choose this date inadvertently, as they think that it is the default required year-end. The year-end you choose when incorporating your business should be influenced by the following factors:
- The year-end should be set to be at the end of a month for which the following month is not busy for your company. This allows you to spend time in your slow month on year-end administrative work.
- If you receive a lot of funding, then matching your year-end with your funders’ year-end allows you to sync up your reporting periods. This can help with administrative necessitates required by your funders.
- If you pay yourself and your staff large bonuses, selecting July or August would be ideal as it will allow you to defer personal taxes from bonuses to the following year should you choose.
- If you have a lot of inventory, picking the year-end on the month where you have the lowest levels of inventory can be beneficial. This will allow a much easier inventory count and an easier work-in-process count and calculation at year-end.
All of these factors should be considered when selecting your corporate year-end; remember, once you select your year-end it typically will stay the same in perpetuity. While changing the year-end after it has been selected is possible it is usually a tedious exercise.
4) “What are some of the deductions I can claim that I likely wouldn’t know about?”
Most small business owners have at least a basic understanding of revenue and expenses; what they may not realize is that there are items that are deductible for tax purposes that you may not normally include in your businesses income statement. Below are some of the most commonly overlooked tax deductions by small business owners:
- Home office – if you have a portion of your house dedicated to your business you could be eligible to claim a slew of home office expenses including rent, utilities, insurance, and even property tax.
- Educational courses – if you are taking (and paying) for any type of course to aid in your duties for the business they are likely deductible for tax purposes through your business.
- Cash – typically small business owners will forget about cash purchases made for the business as there is usually no record of it. Avoid using cash and use credit or debit cards are much as possible to ensure you don’t miss claiming expenses.
5) “I haven’t filed my taxes for a few years, how much trouble am I in?”
Small business owners score off the charts in dedication, creativity, and levels of effort; however, they occasionally score quite poorly on remembering to file taxes. Typically, this is borne out of their time being spread too thin to give any attention to things that do not generate revenue (like taxes) and the often daunting nature of taxes. While taxes may not make you money, they can certainly cost you a lot of money if not completed on time.
If you have been operating an incorporated business your deadline to pay any outstanding income tax is 3 months after your selected year-end and your deadline to submit your completed tax return is 6 months after your selected year-end. Why are there two dates? The 3 month deadline is simply to make a payment on your estimated income tax bill. The 6 month deadline is for you to complete and file your incomes tax return with an additional payment if your estimated tax payment (at the 3 month date) was incorrect.
The penalty for not filing your taxes can be quite heavy. However, because the penalty is based on your outstanding income tax payable balance, if you have not turned a profit you likely will not have any penalties. The good news for those who have been making a profit and not filing their taxes is that, with the right accountant, you can likely ask CRA for a relief on some of the penalties.