A Quick Guide to Understanding Business Tax!

Navigating business tax can be tricky, but learning how to correctly file business taxes in Canada is a crucial step in creating a strong business! 

What is Business Tax? 

In Canada, business tax refers to the different tax filings that businesses are required to file at a provincial or federal level. Depending on the type of business you have, there are different tax returns that need to be filed, such as a T1 or T2. Understanding and managing these tax filings is the best way to make sure that your business is optimising its financial abilities while not getting into trouble with the CRA.

Sole Proprietorship 

If you have a sole proprietorship, you report your business income (not Revenue… but Revenue – Expenses) in the self-employment section of your T1. As such, a sole proprietorship’s tax year is the same as the calendar year. Essentially, your income for your business is treated as personal taxable income on your return. Yes, every dollar of income your business makes, becomes a dollar of personal income.

It’s important to be prepared, so remember to put money aside for your income tax payment throughout the year.  If you have not been making tax instalment payments, you will need to pay all the income tax and CPP/EI for the year by April 30th. Generally, we recommend setting aside 30% of your income in a high interest savings account so that you have enough cash set aside for your tax payment (and earn a little interest along the way!). 

Remember that everyone’s tax rate will vary, and making sure you’ve allocated the funds towards paying this tax can reduce the stress that sometimes comes with tax season. A tax accountant can help you determine an estimated marginal tax rate specific to your situation. You can find out more about this at Entreflow! 

In addition, sole proprietors get an extension on their T1 filing (and their spouses too if you report income on each other’s return). The filing deadline is June 15th; however the payment due date for any taxes owing is still April 30th. 

Business Tax for Corporations 

If you are a corporation, then you will need to complete a different tax return all together. 

The T2 filing is a more complex return, and generally it is recommended that you get support from a CPA for the return. A T2 is typically accompanied with a Compilation, which consists of the financial statements (Profit and Loss, Balance Sheet, and sometimes the Cashflow Statement) prepared by a CPA and signed off by a director of the company . The compilation financial statements are prepared by a CPA and signed off by a director of the company. They are typically used for external reporting purposes (banks, investors, etc.) and can help gather financial information based on your company.  The fiscal year end can be any day throughout the year and there is no set date that you need to choose. Most companies choose a December year end for ease and to be aligned with their personal year end, however any day will be accepted and there are many reasons for choosing a different date. For example, most retail companies with heavy seasonal sales in November and December will opt not to have a December year end as they might have many returns in January. In addition, farming and other seasonal industries will typically choose a year end after the end of their busy season. If you have yet to set a year end, don’t worry. A corporation sets its year end when they file their first T2 return.

Partnerships and Taxes

Partnerships are the final common business type that require a tax return. Because partnerships are not a separate legal entity, there is no tax return per se. Instead, the partners file their own returns (either personally or through a secondary business) and each partner pays their respective shares. This return is mainly an information report to establish financial details. 

Top 5 Tips for successfully managing your taxes:

Navigating the world of tax returns can be tricky. Here are some quick tips to make your life easier! 

  1. Ensure your bookkeeping is done monthly, including bank reconciliations. 
  2. Remember to review your numbers monthly to ensure you understand how the business is performing. You can then prepare for any tax owing in advance, or pivot the business sooner if the business is challenged. 
  3. Use a CPA to file your taxes: they are experts and will ensure all taxes are filed correctly the first time and can support with tax planning to reduce the burden. 
  4. File on time! Make instalments monthly if required of the business and always file in a timely manner.  
  5. Set cash aside monthly for potential taxes owing so that you can pay on time. This takes so much of the stress away from you and lets you focus on growing your business! 
Helina Patience, CPA, CMA
Author: Katharine Galloway

Katharine is currently a student at the University of Victoria pursuing a B.A. and works as the Marketing Assistant at Entreflow Consulting Group.