March 30, 2022
The Canadian income tax system is a progressive tax system requiring Canadians to pay a combination of both federal and provincial income taxes, using segmented tax brackets that increase successively. According to CPA Canada, tax compliance is becoming exceedingly difficult for Canadians, especially small business owners, putting the integrity of the tax system in jeopardy2. The purpose of this article is to highlight some key deadlines and obligations every business founder should be aware of to navigate this complicated tax landscape.
It is necessary to remember that small businesses can be structured legally under two forms: sole proprietorship, i.e., a self-employed individual conducting the business, or the business being operated through a corporation. Each legal form has its own compliance requirements. On an annual basis, individuals carrying a business in Canada are required to file their personal tax returns, including their self-employment business and professional income, by June 15th of each year. However, the business owner would still have to pay all amounts owing by April 30th in order to avoid interest. The filing deadline is different for incorporated businesses. Corporations are required to file their corporate tax returns within six months after their financial year-end. For example, if the corporation year-end is on December 31, 2021, the filing due date is June 30, 2022.
Additionally, even if the tax return filing is required six months after the taxation year-end, the obligation to pay any tax liability is generally due two months after year-end for the corporation. Failure to file on time for a corporation may lead to a penalty of 5% of the amount of tax due for the late return plus an interest of 1% tax payable owed per month up to a maximum of 12 months.
Other than the annual tax returns, a business owner, whether directly as a self-employed individual or through a corporation, should also make regular installments to the tax authorities. For a self-employed individual, if the difference between an individual’s tax liability (federal or provincial) in either the current year or in the two preceding years exceeds the amount withheld at source by $2,000 ($1,200 in Quebec because it has its own installment system), the individual must make quarterly installments (at March, June, September and December 15th). The tax authorities may use different bases to determine those installments, such as the current year tax payable estimate, the preceding taxation year tax payable or a mix of the preceding two taxation years. A similar obligation applies to corporations, which must make installment payments of their tax payable at the end of each month, using similar bases to self-employed individuals. However, it is essential to note that no installment is required if taxes payable for the current or preceding year do not exceed $3,000 for corporations.
A small business owner also has an obligation to register, withhold the GST/QST/HST and remit it to tax authorities3. The only exception to this requirement is to be considered a small supplier, i.e., that the revenues from taxable supplies are less than $30,000 in the four preceding calendar quarters. If the business owner is not considered a small supplier, he is required to file GST/HST/QST returns based on the number of sales for each fiscal period. Please refer to the table below for additional information on the frequency of reporting.
Table 1 – Frequency of reporting by sales level
|Sales Levels||Frequency of Reporting|
|Below $500,000 annual sales||Annually|
|Between $500,000 and $6,000,000 annual sales||Quarterly|
|Over $6,000,000 annual sales||Yearly|
The Canadian sales tax system also provides suppliers of taxable supplies with credits for the GST incurred on their purchases, known as Input Tax Credits (ITCs). ITCs can be used to offset GST collected in a period.
Ultimately, a business founder in Canada should be aware of the multiple tax compliance requirements related to the business, from annual corporate filings to installments and sales tax returns, in order to ensure its growth and operation efficiently.
Accountero is a “built for founders” financial hub for growth-focused startups. We simplify the accounting process for business owners. Get timely, one-click access to advisors to help you save on taxes, as well as high-level reports to identify areas of growth potential. Talk to us today about your accounting needs.
Accountero is a tech-powered service provider offering bookkeeping, tax advisory and fractional CFO. Accountero is not a public accounting firm and does not offer services that require a public accounting practice license.
2 CPA Canada, 2018, Canada’s Tax System: What’s so Wrong and Why it Matters, <https://www.cpacanada.ca/en/public interest/public-policy-government-relations/policy-advocacy/CPA-canada-tax-review-initiative/canadas-tax-system>.
3 The harmonized sales taxes (HST) replace the provincial sales taxes (PST) and the goods and services taxes (GST) in the participating provinces. Those provinces are New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island.