Income tax planning – Corporations

March 11, 2015

Income Taxes for Sole Proprietors

Let us go over a couple of basics for income taxes as it pertains to corporations. If you are a sole proprietor, this article is for you.

Determining your year-end

When setting up your corporation it is important to think about your year-end date. Most people immediately think of December 31st as it coincides with the end of the calendar year. However, this may not be the best option for you. Having a year-end other than December 31st allows you to stagger government filings and allows you to take advantage of income tax planning scenarios.

Key due dates

There are a couple of important dates to keep in mind:

  • Tax payment – 2 months after corporate year-end or 3 months after year-end, if your corporation meets certain requirements (check with your tax advisor)
  • Instalments – due on the last day of every month or quarter (depending on how often you are required to pay instalments)
  • Tax return filing – 6 months after your corporate year-end

Don’t miss your due dates! For most corporations with taxable income below $500,000 you will have three months after year-end to pay your taxes. Missing a payment or filing due dates will trigger the Canada Revenue Agency (CRA) to accrue interest and penalties, even if you are only a day late.

Think about credits

Many small business owners are so busy with running their company that the accounting and tax records start to fall behind. It is important to stay up to date and apply for credits and of course your year-end fillings. The Canadian government has great research, development and credit programs for corporations. For example, if you hire an apprentice, the province of Ontario has an apprentice program allowing you to receive a $10,000 credit per year for up to 4 years. Similarly there is a credit for hiring co-op students of up to $3,000 per work placement.

The most popular credit is for Scientific Research and Development (SR&ED). This credit rewards organizations conducting research and development in Canada and allows the companies to recover a portion of their cost. SR&ED can become quite complicated with the required documentation and it is advised to seek the assistance of a professional when completing your claim.

Don’t forget deductions

Most entrepreneurs in their first year of business often forget that a portion of their home office and vehicle expenses are deductible. If you have used your home or vehicle to conduct business a portion of your total expenses is deductible. It is important to keep accurate records for these expenses as business owners often overestimate them.

A good start is to ensure that you have separate accounts: personal and business. I have seen too many entrepreneurs start out by using their personal bank account and credit cards for business making it very hard to keep accurate records. Open a business account and apply for a free credit card, you won’t regret it when it is time to organize your books.

Pay your family

If you have family members that work for you in the business you can pay them for their time. This is a great way to give income to a lower income tax bracket family member and save on the overall family tax bill. It is important to ensure the amounts are reasonable, document the hours they spend on the job.

Hire a pro

Most entrepreneurs want to save costs to keep their company lean and turn to tax software for their businesses. This is a great tool to use, depending on the complexity of your organization. If you have a simple operation with minimal assets and activities, doing it yourself may be the way to go. However, as most small businesses are expanding rapidly they won’t receive the tax advice that they need. Software allows you to put in your numbers and punches out a tax bill or refund at the end of the day whereas a tax professional will help ensure you claim all available credits and give you a solid tax plan for the upcoming year.

Image credit: by 401(K) 2012, via flickr.com.

Author

Nav Dhaliwal

Nav Dhaliwal is a Chartered Accountant based in Toronto, Ontario with several years of experience and a partner at ND LLP. Believing in doing accounting differently, he integrates the accounting world with technology by providing virtual solutions to organizations of every size.