So Many Taxes!
It’s a universal truth that everyone pays taxes. No one can avoid it (legally anyways!). It’s intimidating enough when you have to just deal with your personal taxes, but when you run a business a whole new world of taxes.
Today we’re doing a run-through of ALL the different taxes: what they are, what they’re for, how they’re calculated, and how & when you pay them.
Personal Income Tax
This is the one we ALL have to deal with. Income taxes are paid on money you earn from employment, business, rental, or other such income. They’re calculated using T4, T5, and other such slips that have been filed with CRA, and applying tax deductions, such as childcare, donations, and medical expenses.
If you have a sole proprietor business, you will report your income and expenses on your personal taxes each year.
The result uses some convoluted formula to determine if and what you owe in taxes, or what the feds owe you. Personal taxes happen once a year between March – April for the year before, and if you owe money, it’s due by April 30. Your SIN number is what is used to link you to your income.
GST – Goods & Services Tax
Check out THIS post to read my full rundown of GST. If you’re a sole proprietor business or corporation, you may need to collect/remit GST. GST is a sales tax charged across Canada. Some provinces also charge a sales tax, while others charge HST (Harmonized Sales Tax – which is basically a combined federal and provincial tax). Your GST number is a 9-digit business number followed by RC 0001 (if you have more than one GST account, it might be 0002). If you’re a sole prop, your 9-digit business number will be some new/random number; if you’re a corporation, this number is your CRA Business Number.
When you’ve registered with a GST number, it’s your job to collect GST for the Feds and send it to them. It is NOT your money. Let me repeat that: It is not your money. You’re just a glorified piggy bank for the CRA, holding their money until you’re required to send it to them.
However, if you’ve got a GST number, you get the added bonus of being able to get reimbursed for all the GST that you pay out. So, all those purchases you make for your business not only become expense write-offs for your corporate taxes (see below) but also reduce the amount of GST you have to send to CRA.
Depending on your income level, GST is reported Annually, Quarterly, or Monthly. The frequency really depends on how much GST you’re collecting: if your GST report is HUGE when you do your annual report, you’ll get a letter from CRA switching you to Quarterly; if that gets too big, you’ll get switched to monthly. The hope is that by making you report and pay it sooner, you won’t have to come up with thousands of dollars at a time.
Corporate Taxes
Corporate taxes are income taxes owed by corporations on their profits over the year. Corporations, however, do not have to use the calendar year as their “year”. Corporations can set any fiscal year end they’d like. I usually recommend a time that is a little slower, especially if you need to do things like year-end inventory counts. Setting your year-end after a giant sales season means that your inventory will be low so there will be less to count ;)
Corporate taxes are based on your net income (aka income MINUS expenses). Unlike reporting your business profit on your personal tax return, when you have a corporation, you also have to report your balance sheet:
Assets: what you own (cash, equipment, inventory)
Liabilities: what you owe (cc’s, loans)
Equity: what’s left over (retained earnings, shares)
There is a federal portion and a provincial portion to your taxes. While they’re both prepared and filed together, you have to pay CRA for the federal portion, and your province (i.e. Alberta Finance) for the provincial part. Both can be paid through the “Tax File Pay” system that you can set up with your business bank.
Your corporate tax number is your 9-digit business number, followed by RC 0001.
Payroll Taxes
Payroll taxes are only relevant if you run payroll. You can have a payroll account if you’re a sole prop or a corporation; regardless, they work the same. Payroll taxes are the taxes you hold back when you pay your employees. This will be their personal income tax (see above) that is pre-paid on your employee’s behalf, as well as the EI and CPP that they owe. As the employer, you’re also required to match your employees’ CPP contributions and pay 1.4 times the EI owed by your employees.
Every month you need to report to CRA what you paid your employees, what taxes you held back, and what taxes you’re contributing. And then you also need to send them that money. Generally speaking, you need to file and pay these amounts by the 15th of the next month.
At the end of the year, when you file the T4 slips for each of your employees CRA will compare the T4 totals against what you reported and paid over the course of the year. If anything was wrong, you’ll owe them the difference.
Like the above, your payroll number will be your 9-digit business number, followed by RP 0001.
Other Taxes
You might hear about a few other taxes in your business travels, or if you’re poking around in your CRA account. Here’s a quick list in case you need to know. All of these will start with your 9-digit business number.
RD – This is for Excise Taxes; if you deal with alcohol you might need this
RR – This is for Registered Charities
RZ – This is for information returns, the most common use for this is to file T5’s (dividend income) or T5018 forms, if you’re in construction
RM – This is for importing/exporting reporting & taxes
Those are the big ones. Now bookmark this page so you know where to find it when you need it…and purge the information from your mind so you don’t get bogged down with it!