With the GDP growth of Canada’s tech sector leading the overall economy, it’s fair to say Canada provides an ideal environment for tech startups to thrive. However, they may also face unique challenges when it comes to taxes since Canada’s tax system can be hard to navigate at first. On a positive note, there are also several tax credits available to tech startups.
While the Canada Revenue Agency (CRA) provides all the information you need to know, even the fastest-growing tech startups are often confused about their tax responsibilities. This article will give a quick overview of some of the most important tax considerations for tech startups in Canada.
Taxes
Learning what taxes you are subject to can be tricky, as it depends on several factors. Below, we enumerate the basic taxes for tech startups.
Corporate Tax (T2)
All businesses in Canada are required to file a corporation income tax return (T2) every tax year, even if there is no tax payable. This can be done online through the Government of Canada’s website portal.
Most businesses can choose the end date of their tax year. On your first T2, your start date would be the date of your incorporation. For the following T2 returns, your start date would be the day after your tax year-end.
Goods and Services Tax (GST)
Any corporation that makes taxable sales or have a yearly revenue beyond $30,000 are subject to the Goods and Services Tax (GST). If your business doesn’t exceed the threshold, you are considered a small supplier, and you won’t need to file GST.
Depending on your gross revenue, your business may need to file either monthly, quarterly, or annually.
Payroll Deductions
Tech startups that pay salaries and provide taxable benefits to employees should register a payroll account with the CRA to make payroll deductions.
Your remitting frequency depends on your average monthly deductions. If you have an average of $2,999 or less, your business can file payroll deductions quarterly.
Provincial Taxes
Your startup may need to pay additional taxes depending on where it is registered. For example, The Provincial Sales Tax (PST) applies to businesses residing in Saskatchewan, Manitoba, and British Columbia.
To know more, read our separate guide where we detail the different tax types.
Tax Credits
With many taxes due, you can benefit greatly from some tax credits. The Canadian government offers a few tax credits for tech startups, which can help offset the cost of doing business.
Investment Tax Credit (ITC)
The investment tax credit (ITC) is a federal tax credit that can be claimed on eligible investments in certain types of property, such as computers and software. The ITC can be used to reduce the cost of certain business expenses, such as the purchase of new equipment.
The ITC covers a vast number of incentives and has different types. Below are the most relevant ones for tech startups, as these are industry-based incentives.
Scientific Research and Experimental Development Tax Credit (SR&ED)
The most relevant credit for tech startups is the Scientific Research and Experimental Development (SR&ED) tax credit, which is also the most common type of ITC. This credit can be claimed up to 35% for expenses related to scientific research and experimentation conducted in Canada.
To be eligible, your startup must have a profit motive and be carrying out activities that advance scientific or technological knowledge. The SR&ED tax credit can be a valuable way to reduce your taxes, so be sure to talk to your accountant or a financial expert about whether your startup qualifies.
Carbon Capture, Utilization and Storage Refundable Tax Credit (CCUS)
The carbon capture, utilization and storage (CCUS) refundable tax credit is available for businesses that have invested in CCUS technologies since January 1, 2022. It’s a new effort by the government to capture carbon dioxide emissions and find an eligible use for them. Here are the tax credit rates:
- 37.5% to 60% range, from 2021 to 2030
- 18.75% to 30% range, from 2030 to 2040
Apprentice Job Creation Tax Credit (AJCTC)
The Apprentice Job Creation Tax Credit (AJCTC) is a federal tax credit that helps businesses offset the cost of hiring and training apprentices. The credit is worth up to $2,000 per year for each eligible apprentice.
To be eligible, your startup must hire an apprentice who is enrolled in a qualified apprenticeship program. The AJCTC can be claimed for up to two years of an apprentice’s training.
Small Business Deduction (SBD)
The small business deduction (SBD) is a tax break that allows you to pay less tax on the first $500,000 of active business income. This deduction can be a big help for tech startups, as it can reduce the overall tax bill by up to $13,750.
Bottom Line
Ensuring your startup’s tax compliance may be daunting at first, but it’s a breeze once you know how the tax system works. To make things easier, you may consult with a tax advisor who is familiar with the tech sector.
Accountero helps you get connected with the best tax and financial experts in Canada. As one of the fastest-growing Toronto SaaS companies in the accounting space, we also offer digital bookkeeping, forecasting, and other services that make for a stress-free tax season.
Letting an expert handle your finances is key if you want your startup to focus on more important matters – and we’re equipped with the expertise to help you do just that. Canadian tech startups can trust us to take care of the finer details, Talk to us today about your accounting needs.