Ronika Khanna covers four tax obligations for Canadian corporations: corporate income tax with a six-month filing deadline, dividend reporting by February 28, sales tax registration once you hit $30,000 in rolling four-quarter sales, and payroll deductions. Owner-employees with over 40% ownership skip EI contributions.
Questions this video answers
No more than 53 weeks after the incorporation date.
Six months after the corporation's fiscal year end.
CRA starts charging interest after three months; Revenue Quebec after two months.
By February 28 of the year following the year in which the dividend was paid.
Once you make $30,000 in sales over a rolling four‑quarter period.
Chapters
Hello everyone. When you start your small business or become a freelancer or choose any type of self employment, you are required to choose a business structure. In Canada. This can be a sole proprietorship or a corporation. Assuming you have gone through the analysis and you have decided to incorporate your business, it is really important that you understand the tax obligation obligations that apply to all corporations. And as a small business corporation, there are generally four primary types of tax obligations and in this video we are going to go over each one of them. My name is Ronica Canna, I am a cpa, a CFA and the founder of Montreal Financial, where you can find lots of resources for small businesses, solopreneurs, etc. And I encourage you to sign up for my newsletter. Okay, so the first tax obligation that we are going to talk about are corporate income taxes. So every corporation without exception must file a corporate income tax return. This corporate corporate income tax return is based on your year and that a year end is established generally when you set up your corporation, although it can be set up later if you want. And the rules for setting up your corporate year end are that it can be no more than 53 weeks after the incorporation date. And one thing to keep in mind about a corporate year end is that it does not have to be December 31, although that is still the most popular corporate year end. However, you can make it literally any day of the year, although it is encouraged that you make it the last day of a month and that is common and best practice. So for example, if you were to incorporate start your incorporation on October 15, it might make sense to choose a September 30 year end. You could also choose December 31, or you could choose June 30, depending on your business seasonality and some other factors.
Once you have established your year end. And so for in our example, so say you choose September 30th, then your corporate tax return is due six months after your year end. However, keep in mind that Revenue Canada and if you are in Quebec start charging interest on any balances due after three months Revenue Canada and after two months for Revenue Quebec. So it might make sense to prepare and submit submit your corporate tax return as soon as possible after the year end and this will likely be up to an accountant, which I highly encourage for corporate income taxes. Okay, the second tax obligation that applies only and specifically to corporations relate to dividends. And a dividend essentially is a payment that you take from a corporation as a shareholder of that corporate corporation. If you declare a dividend, you would have to pay the shareholder belonging to a class. Say you have two shareholders in Class A and they each own 50% and you declare a dividend of $10,000. Each shareholder would get $5,000. Dividends can be decided at the end of the year and when you do take dividends, you are required to file a T5 slip with Revenue Canada by Feb. 28. So the year following the year in which you took the dividend. This is also known as an RL3 in Quebec with the same deadline. And when you take a dividend you simply report the amount that you withdrew or took as a dividend from the corporation. But the corporation does not have to deduct any taxes. Instead, the shareholder who receives the T5 will report the amount of the dividend on their personal tax returns and will pay taxes on their personal tax returns.
There are a lot of discussions or whether you should take a salary or dividend and I will be doing a video on this in the future.
The next tax obligation relates to sales taxes, gst, HST and QST in Quebec. And this is a tax obligation that applies both to sole proprietorships and corporations. Keep in mind, if you are transitioning from a sole proprietorship to a corporation, you have to get new GSTHST numbers just like you'll get new business numbers for your separate corporate legal entity and sales taxes. And I have a couple of videos about sales taxes. But just so you know, you are required to register in most cases once you make $30,000 in sales or revenues over a four quarter period. So you need to recalculate your sales every four quarters, not on a yearly basis but every four quarters to determine if you have exceeded the $30,000. However, for some corporations it is actually beneficial to register right away, especially those with high startup costs, because you can claim back the sales taxes that on expenses relating to your corporation. So often if you have high startup costs and very little sales or no sales in the beginning, you are actually entitled to a refund for the total amount of taxes that you pay on your expenses. So this is something to consider. And when you set up your corporation you might want to also register for sales taxes and get that GST HST number right away.
The final tax obligation that applies to both sole proprietorships and corporations relates to payroll and payroll applies to when you hire employees you are required to give them a paycheck from which you take deductions. They're referred to as deductions at source. So you reduce the paycheck by income taxes, CPP.
EI, etc you do a calculation and you remit this to Revenue Canada on a usually on a monthly basis. If your payroll is very small, this might be every quarter, but certainly in the beginning it is usually on a monthly basis. And the payroll is important because even if you have no employees, let's say you're a solopreneur, you can actually hire yourself as an employee. And there's lots of advantages to doing this. You contribute to the Canada pension plan, which means that you are automatically enrolled and you will receive a pension when you retire. Additionally, salaries accumulate. RRSP room. This is not the case with dividends. And there's a variety of other factors. And also the subject of another video. Keep in mind, if you do just hire yourself as the owner manager of the corporation, as an employee and you own more than 40% of the corporation, you do not have to contribute to employment insurance, nor are you entitled to collect it. So as you can't really fire yourself, it's something to keep in mind. It's a little bit of a savings and it might make sense to take that and put that into a separate account in case you are not able to work for a little while.
Just to summarize.
You essentially have as a corporation four types of tax obligations. First of all, you have your corporate tax. All corporations must file a corporate tax return. It is mandatory. You have dividends or which only relates to corporations because dividends can only be paid to a shareholder of a corporation. Thirdly, you have sales tax if you decide to register that. It is not mandatory to register until you reach $30,000 of sales, although there are some exceptions. So it's important that you look into that. And of course, note that sales tax applies to both sole proprietorships and corporations. And then finally, you have payroll, which is. Which will apply if you have employees that you are hiring or you are hiring yourself as an employee as the owner of the corporation. And in this case, you must register for federal payroll number and remit the deductions that are taken off of your paycheck generally on a monthly basis.
So that concludes the tax obligations for corporations. I hope this was helpful. If you have any questions about this video, please do not hesitate to leave a comment. And I would love to hear your experience with starting a corporation. Have a great day.
