Please read our frequently asked questions for valuable advice and help.
How can I reduce my chances of an audit?
The best defense against an audit is to file your tax return every year and on time. Why give the CRA a reason to examine your tax situation? Get it done! If you file a GST return, make sure the revenue on your business statement T2125 matches the revenue that is on the GST return.
Should I incorporate?
Incorporating your business has some advantages and disadvantages. Few of them are as under:
- Limited liability :Your risk is limited to what you have paid for your shares in the corporation. Since corporation is a separate legal entity the liabilities of the corporation are not the responsibility of the shareholders. All obligations of the corporation belong to the corporation i.e. if you paid $100 for your shares in the corporation, your total possible loss would be $100.
- Tax Deferral :The tax rate for corporations generally, in certain situations, is approximately 15% whereas the tax rate for individuals varies from approximately 21% (Lowest Tax Bracket) to approximately 46% (Highest Tax Bracket) depending on the annual income. If the income earned in the corporation is left in the corporation, corporation will pay tax approximately around 15% on active business income. Similarly if the same income was earned personally, the individual will pay approximately around 46% in taxes (in higher tax bracket). Therefore, there is a deferral of approximately 31% (46 - 15). Once the income is paid out as a salary, the deferral is over.
Note: All tax rates are approximate, please call or contact your accountant to confirm the applicable tax rates as these may change.
- Cost :Incorporating could cost you anywhere from $700 to $2,000 depending upon the various circumstances and your requirements.
- Tax Return :Filling tax returns for all corporations is mandatory even if corporation is inactive or has $0 income or loss. In order to file tax returns, corporation may have to pay accountants for preparing financial statements & filling tax return and the cost will vary depending upon the individual situation of corporations.
- Losses :Generally in first few years most of the corporations incur losses as the initial cost of doing business is high. These losses remain in the corporation and can be carried forward for twenty years to offset against the future gains of the corporation. Losses can also be carried backward for three years to offset gains in the previous years. These losses generally cannot be claimed in personal tax returns. On the other hand, if you are operating as a sole proprietor, you could deduct the business losses against other personal income i.e. employment income.
When is my corporate tax return due?
All corporations have to file their tax return within six months after the fiscal year end i.e. if the fiscal year ends on March 31st then the tax return needs to be filed by September 30th. But any taxes due have to be remitted within 60 days of fiscal year end.
Do I have to file a corporate tax return?
All corporations have to file a corporate tax return every year, even if the corporation is inactive or has no tax payable. The only exception to this is a corporation that is a registered charity throughout the year.
Nonresident corporations:Nonresident corporations have to file a tax return in Canada if any of the following occurs:
- If it carried on business in Canada
- If it had a taxable capital gain
- If it disposed of taxable Canadian property
Taxable capital gains that result from the sale of shares on a listed stock exchange are excluded from this requirement.
What can happen if I don't pay my tax bill?
After a tax assessment has been mailed to the taxpayer, payment in full is due immediately. If you don't make a payment, or don't contact CRA to make payment arrangements, or don't file an objection the CRA can begin to take collection action. The CRA can employ many methods: garnish your wage, hold back income tax refunds, seize your bank accounts and other assets (home, cottage etc.), can register liens on your property etc.
Do I have to file a tax return?
You must file your tax return if you:
- Have to pay tax.
- Received a request to file a return from the CRA.
- Want to split your pension with your spouse or common law partner.
- Received working income tax benefit (WIB) advance payments during the year.
- Disposed of capital property.
- Have to repay Old Age Security or Employment Insurance benefits.
- Need to contribute to the Canada Pension Plan (CPP).
- Have to pay employment insurance (EI) on self-employment and other eligible earnings.
- Have withdrawn money from your RRSP account under the Home Buyers' Plan or Life Long Learning Plan and have not repaid it yet.
Even if none of the above applies to you, you can file a tax return if any of the following apply to you:
- If you want to claim a refund or apply for the GST/ HST credit.
- If you want to claim the WITB or Ontario tax credits.
- If you and your spouse or common law partner want to claim the Canada Child Tax Benefit.
- If you incurred a non-capital loss and you want to carry it back to a prior year.
- If you want to carry forward the unused part of your tuition, education & textbook amount.
- If you want to report income which could increase your RRSP deduction limit for the future years.
How long should I keep my records?
As a general rule, you must keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years from the end of the last tax year to which they relate.You should keep your supporting documents for six years.
What are the penalties and interest if I do not file on time?
If you owe tax and do not remit it by April 30th then the penalty is 5% of the outstanding balance owing plus 1% of balance owing for each full month your return is late to a maximum of 12 months. If you have been charged late filling penalty on your three previous year return then the penalty doubles i.e. 10% + 2% for each full month.
Note: Even if you cannot pay your balance owing, you can avoid the late filling penalty by just filling your return on time.
Will I receive interest on my refund?
Interest will begin to accumulate on the latest of the following three dates: The 31st day after you file your tax return. 31 days after the balance due date for the year - This could be May 31st for individuals with employment income or July 15th if self-employed.
What information do I need to have ready to have someone prepare my tax return?
You will need all your T slips i.e. you will need your T3, T4, T5, T5008, and RSP deduction slips etc. In addition to this you should have tuition slips, child care receipts, children’s' fitness program receipts, charitable donation receipts, monthly GO passes & rent or property tax receipts. If you use your vehicle for work then you should have form T2200 completed by your employer. In addition to this you should have the purchase invoice if purchased a new vehicle, monthly lease agreement along with fuel receipts, insurance costs, repair & maintenance invoices and your log book. To claim for home office you should have all your utility bills, rent or property tax receipt, repair bills and yearly mortgage statement to figure out annual interest paid on mortgage. Do not forget to bring the last year’s tax return along with notice of assessment received from CRA.
How long will it take to get my refund?
If the tax return is electronically filed, the return usually takes between eight to fifteen days. If you have filled paper return then it usually takes four to six weeks, some exceptions apply.
When do I have to file my tax return?
For individuals with employment income the last date of filling return and paying your due taxes is April 30th. If you owe taxes then make sure your return is filed before April 30th or postmarked before midnight on the due date in order to avoid late filling penalties. If you or your spouse/common law partner carried on a business then your return should be filled on or before June 15th. However, any balance owing has to be remitted by April 30th.