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Whether you own a business or not, all Canadian residents are required to file an income tax return with the Canada Revenue Agency (CRA) every year.
Beyond that, any person conducting a business—and this refers to an sole proprietorship, partnership, corporation, and so on—is required to keep books of accounts and records that provide the capacity to accurately calculate taxes payable. Essentially, this refers to a reliable, thorough, and systematic approach to tracking income, expenses, and sales taxes collected.
On top of that, these books and records must be supported by "source documents" that serve to back up the amounts in the books of account. Source documents include invoices for purchases and sales, receipts, cheques, deposit slips, contracts, and more.
These books, records, and source documents are used to prepare a business’s financial statements. Preparing these statements according to generally accepted accounting principles (GAAP), is strongly recommended.
And remember: Depending on several factors, the books, records, and source documents that are used to prepare financial statements and tax returns have to be retained for many years beyond the year those statements were prepared. For instance, in the case of simple income tax documentation, records must be retained for six years.
Based on the requirements above, when starting a small business, it’s wise to take a two-pronged approach to setting up your record-keeping:
Year by year, you’re likely to save money and avoid problems by having your accountant or tax advisor review your bookkeeping and tax data. And because your accountant is familiar with reputable brands of accounting software, having computerized records will speed up his or her review of your returns and make it easier to give you advice on how you can run a more profitable operation.
The CRA presides over what is known as a “self-assessment tax system.” Essentially, this means Canadians are following the tax laws on a voluntarily basis, but they have some firm incentives to do so. Taxpayers are compelled to accurately and forthrightly declare their taxes under the risk of being audited by the CRA.
After an audit or late/missed payment, if the CRA determines that discrepancies exist, it has the authority to notify those who have been audited of an added tax reassessment and to levy various penalties, including criminal prosecution. The CRA states that without the threat of the Canadian government auditing taxpayer filings, the tax system would end up becoming ineffective.
As a business owner, it’s likely you’ll be required to make monthly or quarterly payments—miss one of these and the interest meter starts running. Go past $1,000 in interest owed and the penalties kick in as well. In other words, make a mistake and/or come up short at payment time and an audit can be costly. Note: It’s worth noting that disputing and/or appealing the CRA can be costly. It isn’t easy, and the CRA has heard all the excuses.
With that said, here’s a very brief and by no means all-inclusive summary of some of the tax issues Canadian small business start-ups need to be familiar with:
Should you organize your business as a sole proprietorship, a partnership, or a corporation? This question often boils down to a handful of considerations. The more revenue your business takes in and the greater your liability risks are, the more likely incorporation makes sense.
That’s because even though incorporating requires a special legal agreement with the government, separate tax filings, and issuing shares of stock, the corporate tax rate is lower than personal income tax rate above a certain threshold. Also, in case of the business’ being sued, corporate liability is limited to the value of what the corporation owns, not what you own personally, such as your home.
What about all those sales taxes? Invoices you give clients or sales receipts produced by your cash register have to clearly account for the Goods and Services Tax (GST/HST), the Quebec Sales Taxes, and Provincial Sales Tax (PST). For invoices you pay, you have to track the GST/HST and QST that business pays. As a business, you pay the net GST/HST and QST collected to the CRA or Revenu Québec and pay PST collected to the respective provincial authority. This means registering with the CRA (or if in Quebec, with Revenu Québec) and with the provincial authority for a sales tax accounts and tax numbers.
What about employees? An employer is required to withhold income tax and payroll taxes—such as Canadian Pension Plan and Employment Insurance payments—and to periodically remit the withheld amount to CRA. At the end of February, an employer is required to file T4 slips for wages paid to each employee and a T4 summary return with the CRA.
Keep the above overview in mind and recall the earlier “word to the wise.” The complicated nature of tax matters, the fact that tax rules and rates are always in flux, and the serious risk of an audit mean, once again, that an accounting software solution combined with advice and help from an accounting or bookkeeping professional is a big advantage at tax time. Of course, according to the CRA, taxpayers are legally responsible for their own financial records and tax filings, regardless of whether they hire a third party to maintain their financial records.
That’s why an accounting software solution is a useful tool. A modern solution offers these advantages:
Software can help with more than just taxes. It makes completing a wide range of business and accounting processes faster and easier, as well. As a start-up business owner, it’s crucial to recognize the limits of your skill set and use technology to fill in the gaps. That saves time, money, and headaches.
Above all else, the complexity of the tax code for Canadian small business shouldn’t scare any new start-up owners away from involvement in what could be an exciting and profitable opportunity.
Powerful software solutions don’t present anything approaching a prohibitive cost—in fact, they may be among the most cost-effective tools a small business owner deploys. Furthermore, engaging an accounting professional who will use the data from your automated accounting system can help you maintain a spotless relationship with the CRA. That should give a start-up owner confidence.
And that kind of confidence paves the way for small business start-up success.
At Sage, the source of our inspiration and innovation for Sage 50 (formerly known as Simply Accounting) never changes. Our mission is always driven by the energy and creativity of Canadian business owners pursuing their dreams. Helping them reach their goals is what we do.
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