The different types of business structures we’ve discussed impact the type of tax returns you file each year. For example, with corporations, your revenue/income and expenses are filed using a corporate income tax return, whereas with sole proprietorships and partnerships, your revenue and expenses are included and filed on your personal income tax forms.
What are a business’s obligations to the Canada Revenue Agency (CRA)?
Many expenses from your business can qualify as income tax deductions – this means that certain things like travel and home office space can reduce how much tax you have to pay each year. Registered Retirement Savings Plans (RRSPs) can be especially useful for reducing the amount of tax you have to pay (if you have a sole proprietorship or partnership). Because you can claim certain items/expenses, this means you have to keep track of all your receipts and make sure you’re doing proper bookkeeping and record management (more on this in Lesson 14: Order to Chaos).
What kind of business expenses can you deduct from your business income?
The best thing to do is to consult the CRA website to find out more about what forms to use, what to claim, etc. You may also want to hire an accountant, especially if your business is a corporation. The CRA offers online options to keep track of your tax information and to file your tax returns online. You can also use external CRA-approved tax software for filing. Note that different tax deadlines apply for different types of business structures, as well as if you are registered for GST/HST.
The Goods and Services Tax (GST) is a federal sales tax of 5% that is added to the majority of the goods and services we buy and sell in Canada (though some items are exempt or zero rated). The basic difference between zero-rated and exempt goods and services is that you can claim input tax credits (more on this later) for anything zero rated but not for anything that is exempt.
GST can be combined with a province’s Provincial Sales Tax (PST) – this is known as Harmonized Sales Tax (HST). Whether you charge HST, GST, or GST and PST depends on where you live and the nature of your business.
What does this mean for your business?
It can get a little complicated, so we’ve tried to cover the basics here for you. Registering for a GST/HST account is mandatory for all small businesses that make a gross annual revenue over $30,000 (this means you make over $30,000 before expenses), unless your product/service is GST/HST exempt or zero rated. If your business earns under $30,000 (classified as a small supplier), you can still choose to voluntarily register. Some business advisers recommend this, because it makes your business seem more professional or successful to your potential customers. Do you want to advertise that your business is earning under $30,000? Does it matter? Take some time to think about this .
Once you’re registered for a GST/HST account, you then have to charge Canadian customers GST/HST on any taxable goods and services you sell in Canada. Obviously if you aren’t registered, you can’t charge customers GST/HST. Registration is done through the CRA, except in Quebec, where registration is through Revenu Québec. Once registered, you have to let your customers or clients know that you’re charging them GST/HST – the most common way is via your receipts, invoices, or contracts.
Each time you bill a customer/client and receive payment that includes GST/HST, you have to collect that GST/HST and set it aside; it’s not part of your profits. You then have to file a GST/HST return – this is separate from your income tax filing and usually has different deadlines based on when you register. You pay (or remit) the GST/HST you’ve collected to the government, either in installments or in one lump sum. The CRA will tell you what your reporting period is once you register; this means the length of time you have to track and collect the GST/HST before you file a return (it’s usually a calendar year). The CRA will also let you know if you need to pay in installments.
Once you start charging GST/HST, depending on the purchase or expense, you might be able to get back the GST/HST that you pay or owe on purchases and expenses – in the form of input tax credits (ITC). The purchases and expenses you claim must be directly related to your business activities; if you aren’t using what you bought directly for your business, then you can’t claim an ITC for it. Again, this means you have to do some careful record keeping to make sure you know how much GST/HST you’ve paid.
You can find out more about GST/HST on the CRA website.