What books and records must be kept for a business? Any person (individual, partnership, corporation, trust, etc.) carrying on a business must keep books of accounts and records which provide the ability to calculate taxes payable. These books and records must be supported by "source documents" which substantiate the amounts in the books of account. Source documents include (but are not limited to) invoices for purchases and sales, deposit slips, cheques, bank statements, work orders, cash register tapes, purchase orders and receipts, credit card receipts and statements, contracts, guarantees, email and general correspondence, financial statements, tax records, ledgers, journals, log books, appointment books, spreadsheets and accountants’ working papers and contracts. Your records are used in determining your tax liabilities and you must be able to support your claims in the event of an audit. The onus of proof is on the taxpayer and unsupported claims may be denied. For purposes of income tax, many books of accounts, records, and source documents have to be retained for a minimum of six years after the end of the last tax year to which they relate. In the case of records regarding capital purchases, the last tax year to which they relate would be much later than the acquisition date. It would be the tax year in which a disposal of the capital property occurred, because the purchase records would be required to calculate the gain or loss on disposal. Thus, records regarding capital property should normally be kept until six years after the end of the tax year in which the capital property was sold. Some books and records of the business of a person (other than a corporation) must be retained until six years after the tax year in which the business ceased. These books and records include, according to Regulation 5800: (i) the general ledger or other book of final entry containing the summaries of the year-to-year transactions of the business, and (ii) any special contracts or agreements necessary to an understanding of the entries in the general ledger or other book of final entry referred to in paragraph (i) Some corporate records must be kept until two years after the day the corporation is dissolved. These records include: (i) minutes of the meetings of directors of a corporation, (ii) minutes of meetings of the shareholders of a corporation, (iii) any record of the corporation containing details with respect to the ownership of the shares of the capital stock of the corporation and any transfers thereof, (iv) the general ledger or other book of final entry containing the summaries of the year-to-year transactions of the corporation, and (v) any special contracts or agreements necessary to an understanding of the entries in the general ledger or other book of final entry referred to in paragraph (iv). The books and records may only be destroyed earlier than this with the permission of the Minister. This can be requested by filing Form T137, Request for Destruction of Books and Records. Further information is available on this topic on the Canada Customs and Revenue Agency (CRA) web site, from Information Circular 78-10R3.
The Business Number The Business Number (BN) is one of the Federal governments initiatives to simplify the way businesses deal with the government. It is a numbering system designed to replace the multiple numbers that businesses require to deal with the government. The BN covers the four major Revenue Canada business accounts: ♦ corporate income tax ♦ the goods and services tax (GST) ♦ payroll deductions ♦ import/export Do You Need a Business Number? If you need at least one of the four Revenue Canada business accounts listed above, you will need a BN. It is the same number whether you are incorporated or not. You should note that if you operate as a sole proprietor or a partnership, you will continue to use your social insurance number (SIN) to file your personal taxes but the BN for the above 4 accounts. The BN details The BN consists of 2 parts - the registration number and the account identifier. The entire number has 15 digits: 9 digits to identify the business 2 letters and 4 digits to identify each account the business may have For example, 123456789 RP 0002 means - this means business number 123456789, payroll account and the fact that it is the 2nd payroll account. The 2 letters identify the accounts: RC - corporate income tax RT - GST RP - payroll deductions RM - import/export
Should you incorporate? Incorporation can be viewed as the final growing phase for a small business. Remember, most big business used to be a sole proprietorship or partnership at one point in their existence. Before deciding on whether or not to incorporate, it is important to weigh the benefits against the costs of incorporation. The benefits of limited liability and reduced tax rates may provide the answer. The tax deferral mechanism on small business income would definitely win converts over to the incorporating camp. However, keep in mind that there are additional costs (legal fees and accounting fees) in starting and maintaining a corporation plus adopting a rational approach in separating yourself from the corporation which is viewed as a separate "entity" in itself. Corporations - Benefits & Drawbacks The decision to incorporate can be based on many factors, but the income tax advantages for small business corporations usually ranks as the top one. If you are a Canadian resident and you own a corporation , it is probably a "Canadian Controlled Private Corporation" or CCPC, eligible for a low rate of tax on the first $400,000 of active business income (it must be business income, not passive investment income). There is therefore a large potential tax saving by the use of a CCPC. If you earned a profit of $200,000 in a sole proprietorship, you would pay @ $90,000 in personal tax, whereas if $200,000 was earned in a corporation in Ontario, only about $45,000 in corporate tax would be due. The important thing to remember is that there is basically no benefit if you need to withdraw all the funds from the corporation to live on. That is because once you withdraw the funds (by a dividend), you will be taxed on the dividend. The tax system is designed to make the combined taxes paid by the corporation and you personally equal to what a sole proprietor would have paid without a corporation. This works quite efficiently and is the reason for dividends being "grossed-up" by 25% and the existence of the dividend tax credit (it is not designed just to confuse us as one might be inclined to believe!). If you incorporate and your company makes more than $400,000 profit in a year, it makes sense to declare a "bonus" payable to yourself (or any employee for that matter), to reduce the taxable income in the corporation to $400,000. That is because the tax system will result in more tax (double taxation) i.e.. the tax paid by the corporation and the person (s) involved would exceed that of a person who did not incorporate (don't get too worried about the details - if you are in this situation you are business is doing very well!). Benefits of Incorporation Tax deferral on first $500,000 of income - this is the main benefit and has been discussed above. Deferral of year end bonus - if you have not yet chosen a year-end, make it after June 30. That is because the bonus discussed earlier to bring the corporation's income down does not have to be actually paid out at the year end date - any time within 180 days is acceptable. If, for example you have a September 30 year end, you could declare a bonus for say $100,000, deduct it as salary expense in the corporation for the year ended September 30, but not pay it until January of the next year. You only pay personal tax on the bonus the next year - a "deferral" of tax for one year. Limited personal liability - legally you are not normally liable for your corporation's debts or other liabilities - incorporating your business significantly reduces your personal exposure to creditors and liabilities. Capital gains exemption - the $100,000 "regular" capital gains exemption was eliminated in 1994, but an enhanced $750,000 capital gains exemption for shares in "qualified small business corporations (QSBC's) still exists. If you sold your corporation for $750,000 you would pay NO income tax. This would save a lot of tax money versus someone who sold the assets of a sole proprietorship or partnership. Also, remember that at your death you are "deemed" to have disposed of the shares in your small business - any tax would otherwise be payable if not for this exemption. NOTE: There are ways to "freeze" the value of your corporation before any sale takes place usually, by the use of a holding company. If you would like more information please call. Income splitting - the use of a corporation allows more flexibility to allocate income to lower tax members of your family. In addition to paying your family members a salary for actual work they do, you can pay dividends (they obviously have to own shares in the company). This is very useful if you have children or a spouse with little or no other income - they can earn up to approximately $30,000 TAX FREE in the form of a dividend. Drawbacks of Incorporation Corporate losses - if the company incurs a loss, the loss stays in the company - it can be carried forward for 7 years and be used to offset profit in future years, but it cannot be used to offset other sources of personal income. In a sole proprietorship, the business loss goes on you T1 personal tax return and can reduce you personal income (and therefore income tax). It therefore often makes sense, if the start-up phase of your business is expected to be in a loss position, to start out as a sole proprietorship so that you can use the losses personally. Once the business becomes profitable, you can incorporate to take advantage of the benefits discussed above. Costs of forming and running - in addition to the costs, there are also higher costs of administrating a corporation including legal, accounting and office expenses. While shareholders have limited liability, directors of a corporation are subject to various liabilities. These include liabilities for unremitted source deductions, unremitted PST and GST and certain environmental liabilities. Furthermore, passive directors who may not be involved in running the business may still be subject to certain of these liabilities. Passive directors should be aware of what the corporation is doing and should ensure that director's liability insurance is in place to protect them. A potential double taxation trap exists if an active business earns too much profit. Corporate profits from active business income in excess of $300,000 per year are taxed at full corporate rates. Integration of the personal and corporate tax systems does not work at that rate, resulting in an element of double taxation. Therefore all income in excess of $200,000 should usually be paid out of the corporation by way of salary or bonus to avoid this double taxation trap. If the corporation requires the funds for operations, the income can be paid to the shareholder and then loaned back to the corporation. The salary receipt is, however, taxable to the shareholder. A corporation is also subject to strict rules governing the taxation of shareholder benefits, such as shareholder loans or the use of a company car. Finally, the transfer of the unincorporated business or partnership to a corporation will be a taxable transaction unless a rollover agreement is made and the appropriate election is filed with Revenue Canada. Provided such an election is made, however, the transaction can be free of any immediate adverse tax implications. When a proprietorship or a partnership incorporates, it is generally a good idea to consider any life insurance needs. Upon the incorporation of a partnership, a shareholders agreement will normally be entered into, often requiring funding through life insurance. An incorporated sole proprietorship may not have any additional life insurance requirements, but in certain circumstances, such as the entrepreneur being a single parent, additional life insurance to pay for any deemed capital gains incurred on the death of the shareholder might be appropriate. Summary In many cases, the combination of limited personal liability and the lower rate of tax far outweigh the drawbacks. If you have questions about whether incorporating is for you just contact us for more information.
Sole Proprietorships A sole proprietorship is the simplest and least expensive form your business can take. If you start a business on your own, this is the type of business you have started. You do not even have to register your business name if you use your own name for the business (ie. Jane Doe operates a business called "Jane Doe". The income or loss from your business must be calculated on a calendar year basis whereby you compute your profit or loss for the period or year ended December 31. That income or loss goes onto your Individual income Tax Return on line 135 of the T1 General for that year. The form you use to calculate your profit or loss (and file with your return) is Form T2124 - Statement of Business Activities or T2032 - Statement of Professional Activities for professionals (doctors, lawyers, Accountants etc.). If you pay to have your tax return prepared, these forms will be filled out by your accountant. You can save the accountant's time and therefore keep your fees down if you provide him/her with a summary of your income and expenses using the expense categories used in the T2124 or the T2032. Advantages Sole proprietorships are easy and inexpensive to form, you can deduct many expenses that you cannot if you are an employee, and they give you the ability to split income (i.e.: pay a salary to a lower income spouse and therefore pay less tax than if all the income was in your hands). Disadvantages You have unlimited liability for the results of actions taken by the proprietorship. In other words if, for example, a customer sues you because a project you did resulted in him losing thousands of dollars, there is no protection offered by a corporation. That is, all your personal assets including cars, house etc. could be taken from you if you lose the case. You also most likely will have to pay Employment Insurance premiums (previously Unemployment Insurance or UI) if it is determined that you are more like an employee to your client. Also if you secure your work through an employment agency, they will be required to withhold EI premiums from you (and pay their share of 1.4 times what you pay). You also must have a December 31 year end - there is no possibility of deferring income, in other words delaying the payment of taxes on income until the next year. Partnerships - Advantages Partnerships have the same low cost of formation as sole proprietorships. You are also eligible to claim any expenses you incur to earn the income as with sole proprietorships. You can also split the income with other family members to reduce the overall family taxes. Although it is not 100% guaranteed, you will probably not have to pay EI premiums. This also goes for the placement agency you use (if any). Disadvantages You risk the same unlimited liability exposure as with sole proprietorships. In addition, you will be held responsible for anything your partner (s) do. In other words, if a partner signs a lease on behalf of the partnership and then leaves, the other partners will most likely have to honor the commitment. You also must now have a December 31 year end - there is no possibility of delaying income (and tax) until the next year. Summary In many cases people start a business on a part-time basis while still employed. The advantage of this is that the start-up losses can be claimed on their personal tax return and thus reduce the taxable income resulting in a refund of the taxes withheld on the employment income. This thinking also applies to a partnership. The main factor in deciding whether to form a partnership is who the person (s) are - are you sure you can trust them? If not, don't get involved.
What is the GST/HST? The GST/HST, or goods and services tax for British Columbia (harmonized sales tax), is 12% (Prior to July 1, 2010 5%, Prior to January 1, 2008, 6% and prior to July 1, 2006 7%) tax which is charged on most goods and services in Canada. In Ontario, Nova Scotia, New Brunswick and Newfoundland, the GST has also been "harmonized" with the provincial sales tax, to become HST. HST is charged at rates as established by the federal and provincial governments. Any business which is registered to collect GST/HST will be able to recover any GST/HST paid on purchases made in the course of their commercial activities, by claiming "input tax credits" (ITC's) when filing their GST returns. There are exceptions for 'large corporations' and you should consult a qualified professional to determine if these sepcial rules affect your organization. Who has to collect GST? All businesses which provide taxable goods and services in Canada must register to collect GST or HST, unless they are a small supplier. A small supplier is a supplier which has annual gross revenues of less than $30,000, or less than $50,000 for public service bodies (colleges, non-profit organizations, charities, hospitals). However, the calculation of annual revenue is not just done on a calendar year basis. At the end of each calendar quarter, total gross revenues for the past 4 consecutive quarters (i.e., for the past 12 months) should be totaled. If this total exceeds $30,000, the business must register to start collecting GST/HST. Businesses which sell GST/HST taxable goods and services, and are "small suppliers" may voluntarily register to collect GST/HST. In so doing, they will then be able to recover GST/HST that they have paid on their purchases. Business which sell only exempt goods and services may not register to collect GST, and thus may not claim any input tax credits for GST/HST that they have paid. What are taxable goods and services? Taxable goods and services include items which are zero-rated. That is, these items are considered taxable, but the tax rate is zero. These zero-rated items include things such as basic groceries and prescription drugs. Sales of these items must be included when calculating whether or not the business has reached the $30,000 annual threshold for collecting GST/HST. The Canada Revenue Agency (CRA) web site lists examples of taxable (including zero-rated) goods and services and exempt goods and services. How do I account for the GST/HST (British Columbia)? Whether you're a corporation, sole proprietorship or partnership, as soon as your revenue reaches $30,000 in a fiscal year you must register and begin charging the GST/HST. There are choices in how to account for the GST/HST, but these are based on your revenues and type of activity you carry out. If your gross revenue is over $500,000 annually, you cannot use any simplified method discussed here. You must track GST/HST paid separately on all purchases and expenses. However, if your revenues are under $500,000 you can use the Simplified method which is multiplying total GST/HST taxable purchases by 12 and then divide by 112 – thus eliminating the need to track the GST separately. If your gross revenue is under $200,000, consider using the Quick method. Here you charge your customers the regular 12% but only remit a percentage of your GST/HST inclusive sales dependant upon several factors such as; are you a service based business, where are your supplies sourced. Consult the canada Revenue Agency publication RC4058 for detailed instructions on the Quick Method. Commercial goods coming into British Columbia from outside Canada are subject to special rules. In particular, only the federal portion of the HST (GST of 5%) is payable when the goods cross the border and clears customs. So, if your shipment of commerical goods crosses the border into Canada in Alberta, British Columbia or any other jurisdiction, the tax payable on clearing is GST (5%). Easy Methods For GST Accounting Given the HST tax rate of 12% for British Columbia, we recommend filing monthly for all bussineses as this tax may have a significnat impact on cash flow while waiting for refunds of Inpout Tax Credits. The choice as to how to account for the GST/HST is based on your revenues and the type of activity you carry out. If your gross revenue is over $500,000 annually, you cannot use any of the simplified methods I am going to discuss. In that case: Register for the GST/HST and you may file your returns quarterly (monthly if your revenue is over $6 million). Payment is due (i.e.: it must be received) by the last day of the month following the reporting period. In other words, for the period January 1 to March 31, 1999, the GST was due by April 30, 1999. NOTE: You can take your cheque, with your return to any financial institution - they are required to process it free of charge. If your revenues are under $500,000: Register for the GST and you may file your returns ANNUALLY. Quarterly installments will be required only if the total amount payable for the year is over $1,500. Payment is due by the end of the THIRD month following the reporting period. FOLLOW THESE TIPS TO SAVE TIME & $$$ Consider using the Simplified Method: Calculate GST/HST input tax credits (what you paid out in GST/HST - this reduces the amount you charged your customers and you send the difference to Revenue Canada) by multiplying total GST/HST taxable purchases (including GST, PST and tips on meals) by 6 and then divide by 106 - there is NO NEED TO TRACK GST/HST SEPARATELY - This can save a lot of bookkeeping time). NOTE - you can also add the GST paid on capital asset purchases (i.e.. your new computer) - remember to do this no matter what method you use (many people forget this). If your gross income is less than $200,000 and you are not a legal, accounting or financial consulting business, consider using the Quick Method.
Late Filing Penalties Late Filing Penalty (First Occurrence) – 5% of the unpaid tax at the filing due date Additional Penalty – An additional 1% per month of the unpaid tax for each month or part month the return is not filed (to a maximum of twelve months) Late Filing Penalty (Second Occurrence)– 10% of the unpaid tax at the filing due date Additional Penalty – An additional 2% per month of the unpaid tax for each month or part month the return is not filed (to a maximum of twenty months) Tax Tip: To avoid penalties, file your return by the Tax Return Filing - Due Date, even if you cannot pay the taxes owing. Interest on Overdue Tax Payable The rate is set quarterly for unpaid taxes and underpaid/unpaid installments These penalties could be as much as 37-1/2% of the interest (in excess of $1,000) otherwise charged. Although CRA does not have the authority to enforce the payment of installments, it does have statutory authority to levy interest and penalties on installments not made. This applies to corporate tax, GST and personal tax.
Not sure whether your workers are employees or subcontractors? It is important to determine if a worker is an employee or self-employed individual, and thus if there is an employer-employee relationship or a business relationship. Each arrangement has its own advantages and disadvantages. For example, in a business relationship you don't have to worry about payroll taxes, benefits and other taxes not to mention legal and other issues that arise in an employer-employee relationship. However, if you're in a business relationship and Canada Revenue Agency sees it as an employer-employee relationship, it could lead to some dire repercussions (you may have to remit the business portion of the payroll taxes with interest and penalties on subcontractors deemed to be employees for the years in question). When should you complete a T4 slip? You have to complete a T4 slip to report the following: ♦ salary or wages ♦ tips or gratuities ♦ bonuses or vacation pay ♦ employment commissions ♦ all other remuneration you paid to employees during the year ♦ taxable benefits or allowances ♦ deductions you withheld during the year Note: You have to report income on a T4 slip for the year during which it was paid, regardless of when the services are performed or rendered. For example, if a pay cheque dated in January covers income earned in the last days of December, report the income on the T4 slip for the year that starts in January. Who should you complete a T4 slip? You have to complete T4 slips for all individuals who received remuneration from you during the for year if: ♦ you had to deduct CPP contribution; EI premiums, or income tax from the remuneration; or ♦ the remuneration was more than $500 What are your T4 responsibilities? You will need to prepare an information return. To do this, complete T4 slips and the related Summary form. You have to file the T4 information return and give information slips to your employees by the last day of February following the calendar year to which the information return applies. If the last day of February is a Saturday or Sunday, your information return is due the next business day. Penalties and interest If you fail to file the T4 information return on time, the penalty for each failure is $25 a day, with a minimum penalty of $100 and a maximum of $2,500. Information Required for Payroll ♦ TD1 Form – completed by each employee available at http://www.cra.gc.ca. This provides details of their name, address, Social Insurance Number, and birth date. Accounting ♦ Summary of earnings and deductions for the year for each employee ♦ General ledger detail of the payroll account(s) ♦ Taxable benefits i.e. Auto allowance, medical benefits, other ♦ CRA PD7A / Total payroll remittances to the Receiver General for the year. ♦ Workers Compensation Annual Report and details of payments made to WCB during the year What is a Taxable Benefit? Taxable benefits are benefits provided to employees in addition to salary and wages. These benefits are taxable and are added to employment income with very few exceptions. Taxable benefits are calculated according to a specific set of rules and are usually subject to payroll deductions. Some specific taxable benefits include: ♦ Personal use of employer’s motor vehicle(s) ♦ Flat rate auto allowances (not based on number of kilometres driven) ♦ Unreasonable per kilometre auto allowances ♦ Combined flat rate and reasonable per kilometre auto allowances ♦ Transportation provided to and from work ♦ Overtime meals or meal allowances (provided on a frequent basis) ♦ RRSP contributions and administration fees ♦ Premiums for life insurance policies ♦ Medical premiums paid to a public medical insurance plan or a public hospitalization plan ♦ Recreational facilities and club dues (limited exceptions) ♦ Tuition Fees (unless courses are for the purpose of maintaining or upgrading employment-related skills and are mainly for the employer’s benefit) ♦ Benefits from interest-free or low-interest loans (special rules apply to home relocation loans) ♦ Personal travel benefits ♦ Personal income tax return preparation fees ♦ Financial counseling fees ♦ Cash and non-cash awards (from manufacturers to dealers that are passed on to employees of the dealer) What Benefits Are Not Taxable to Employees? Some except ions are specifically provided for; they include: ♦ Reasonable per-kilometre auto allowances based on the number of kilometres driven in the year (subject to conditions) ♦ Parking provided by the employer where parking is available to both employees and non-employees or the employer provides scramble parking ♦ Parking provided to employees for business purposes (where employees have to use their own automobiles or an employer-provided automobile to perform their duties) ♦ Contributions to registered pension plans ♦ Premiums under private health services plans (medical and/or dental) ♦ Premiums paid to group plans for sickness or accident insurance, disability insurance or income maintenance insurance ♦ Employee counseling fees (if they relate to the wellness, mental or physical health of the employee or persons related to the employee) ♦ Financial counseling fees for the employee’s re-employment or retirement ♦ Professional Membership Dues (where the membership is a condition of employment) ♦ Social events provided to all employees where the cost (including any transportation costs) is not more than $100 per person (if the cost exceeds $100 per person limit, the entire amount is a taxable benefit) ♦ Gifts – up to two, non-cash, gifts per year for special occasions (limited to a total cost of $500 – including taxes) ♦ Awards – up to two, non-cash, awards per year for employment-related accomplishments (limited to a total cost of $500 – including taxes) ♦ Discounts on employee merchandise (some exceptions) ♦ Subsidized meals provided at a reasonable cost (where the cost of the food, its preparation and service is covered) ♦ Moving expenses paid or reimbursed (qualifying expenses) ♦ Protective clothing and uniforms (including laundry) ♦ Most disability-related employee benefits that relate to parking and transportation to and from work | 
