Starting a business in Canada is a very exciting opportunity with lots of milestones and a lot more responsibilities. The tax implications of business registration in Canada are one of them.
Small businesses and all other business structures are subject to Canadian income tax. That’s why you should know about the Business tax rates in Canada.
The Federal and Provincial territories govern the Canadian tax laws. They have their own set of rules and regulations that are based on Federal and Provincial tax laws.
Every business structure has different Federal tax requirements in Canada. However, you are also supposed to pay provincial sales taxes. Let’s explore more about the tax implications of business registration in Canada.
TAX IMPLICATIONS OF SOLE PROPRIETORSHIP:
Small business tax implications or sole proprietorship tax in Canada depends on your personal Business income. Since you’re the only owner, your business earnings go on your personal tax return, following Canada’s Income Tax Act. All the tax returns and tax reporting are done by filling out form T2125. It is a statement for professional or business activities.
You are also supposed to pay the Federal goods and services (GST) or Harmonised service tax (HST). You owe these taxes to the Canada Revenue Agency (CRA).
If your annual revenue hits or exceeds the threshold of $30, 000, you are supposed to charge for GST/HST. Every province has different rates for GST/HST. As of October 1, 2016, the GST/HST rate for Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon is 5%. It’s 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. (As rates can change, always be sure to verify your rates.)
The small business tax in Canada can have specific input tax credits, such as:
- Deductions.
- Scientific Research and Experimental Development (SR&ED) tax credit.
- Provincial incentives for hiring and investment can also be granted.
TAX IMPLICATIONS OF PARTNERSHIP:
Partnership tax in Canada is not paid by the partnership itself. Instead, each partner files an income tax return to report their share of the partnership’s net income or loss they encounter.
Most often, partnerships have to file an information return that is file T5013. It provides each partner with their share dues, expenses, and personal income tax rate for return.
Partners of the partnership business are considered self-employed, so they pay their own Canada Pension Plan (CPP) contributions and Employment Insurance (EI).
TAX IMPLICATIONS OF CORPORATIONS:
If you are a resident of Canada and doing your corporate business there, it is subject to the Canadian Income Tax rates (CIT) from worldwide income. However, Non-resident corporations are subject to tax based on income derived from carrying on a business in Canada.
Moreover, capital gains resulting from the disposition of taxable Canadian property are also included.
Corporate tax in Canada is applied by the federal as well as provincial authorities. The revenue earned by the Canadian-controlled private corporations (CCPCs) applies to the federal corporation tax rate. While the provincial tax rate may vary from province to province.
If you have a small business, you can get effective tax deductions for business in Canada. Both from the federal as well as provincial taxes. The federal corporate income tax deduction is applied to the active business income up to a certain threshold level.
Provincial tax rates may offer similar deductions based on their laws and regulations.
Certain payroll taxes in Canada are also applicable to the corporate sector.
TAX IMPLICATIONS OF A LIMITED LIABILITY COMPANY:
The tax implications for a limited liability are like the partnership Canadian corporation.
As in the partnership business, partners pay taxes from their personal income tax. Similarly, in a limited liability, the company does not pay taxes. It is “pass-through” its members. Based on their share holder’s agreement, every member pays tax.
As its members are self-employed, LLC incorporates self-employment tax in Canada.
Proper GST/HST registration is mandatory to avoid any penalties and to ensure tax compliance in Canada.
The LLC tax in Canada requires its members to have specific legal agreements with the CRA as official proof of their corporate agreement.
TAX IMPLICATIONS OF NON-PROFIT ORGANIZATIONS:
Non-profit organizations get an exemption from Canadian income tax. As long as they operate on the below-mentioned purposes:
- Charitable purposes.
- Educational purposes.
- Religious purposes.
The Canada Revenue Agency has defined criteria set to qualify for the tax-exempt status. So if your non-profit organization falls under that criteria, you can have tax benefits for your business in Canada.
However, there are some areas where your tax-exempt status is not applicable. Any business activity other than the charities counts as taxable. They include:
- Investments.
- Commercials.
Non-charitable activities are being charged for taxes at regular corporate tax rates. Non-profit organizations are supposed to submit a form T3010 to the donors who donate to the NPOs. This is a legal and official donation receipt that helps you get tax-exempt status.
GST/HST registration for non-profit organizations should be done. It is because, if your revenue exceeds a threshold level, you will have to pay tax for the non-charitable goods. They include:
- Charity activities.
- Fundraising events.
- Educational programs, etc.
NPOs are supposed to file the form T3010 to keep the CRA updated about their financial activities. So that your tax-exempt status stays protected and avoids any penalties, fee commissions, or other amounts.
KEY TAKEAWAYS:
Starting up a business brings a wealth of exciting opportunities and new experiences. To ensure your business continues to thrive, it’s essential to adhere to the tax filing requirements in Canada.
While the business tax registration process can seem daunting and complex, seeking expert guidance can make it much more manageable. Additionally, by implementing the 7 ways to save money on your Canadian business taxes outlined in our resources, you can optimize your financial strategy and keep your business on the path to growth.
Numeracy Accounting Solutions helps businesses grow with accounting and business expertise.
We provide expert consultations in every business sector. From start-up tax implications in Canada to complex business queries, we have solutions for all.
Let’s connect and make your business’s taxpaying process a lot easier.