Just like many other countries, Canada takes taxes seriously. As a small business owner, the Canadian government expects that you file your income tax each year. And, in Canada, the Canada Revenue Agency (CRA) is the agency that ensures effective tracking of tax returns.
If a corporation in Canada fails to pay its taxes on time or tries to evade tax, it’ll have to face some serious consequences. Imagine having to spend up to two years in prison, and that’s only a part of the possible consequences of not filing taxes in Canada. In this article, you’ll learn in detail what happens when you don’t file taxes in Canada.
Tax Laws For Small Businesses and Startups in Canada
The CRA creates a tax rate and tax bracket to help businesses and individuals know how much they’re expected to pay in tax. Your business’s tax rate will depend on the tax bracket in Canada it falls in according to the income it generates per year.
Small businesses and startups pay income tax in Canada at all three levels of government in the state – the federal, provincial and territorial. As a business, you pay income tax on the profits you generate from your business. In addition to your income tax, you may have to register for the goods and services tax (GST) and harmonized sales tax (HST).
However, if your business gross income is less than $30,000 for four consecutive quarters, you can be exempted from GST/HST. Registering for the GST/HST also becomes optional if your business qualifies as a small supplier, which supplies taxable sales and leases in Canada.
Nonetheless, rules for filing tax returns may differ for corporations registered under the Canada Business Corporation Act (CBCA).
Consequences of Failing to File Income Taxes in Canada
In Canada, every corporation is expected to file its tax returns within 60 days after the date it was incorporated under the Canada Business Corporation Act. Once your tax is due, Corporations Canada alerts you either by email or post so that you can take the necessary action.
However, if you fail to file your tax, the Canada Revenue Agency has its way of always fishing out the tax offenders. But most importantly, CRA doesn’t permit tax offenders to go unpunished. The consequences of not filing your tax returns could be:
1. Late Filing Penalty
Once the CRA detects that you didn’t pay your tax on the due date, you’ll have to pay the full amount plus 5% of the amount as a late filing penalty.
In addition, you’ll have to pay a 1% interest for every month you failed to file your tax. This is highly risky especially for a startup or small business because your business can go into debt.
2. Criminal Offence
Failing to file your tax returns (tax evasion) is considered a crime and attracts huge consequences according to the law. Section 238 of the Income Tax Act, makes it clear that tax evasion can result in a jail sentence of up to one year and a fine of $1,000 – $25,000.
According to Section 239, Income Tax Act, anyone found guilty of tax evasion will pay between half to double the amount they are owing. The offender may also serve a two-year jail sentence.
3. Withholding of Certificate of Compliance
For all sizes of corporations, failure to file your taxes will result in denial of the Certificate of Compliance, a legal document which you need to operate. Once your annual filing reads overdue as a result of failure to file your taxes, your corporation doesn’t qualify for the certificate.
Bottom Line
Failure to file your taxes as a startup or business owner in Canada attracts consequences that may put your business at risk. So, it is best to fully comply with the tax laws applicable to your business. As your business grows, it is prudent to engage a tax advisor to help you plan and save on corporate taxes, and make informed business decisions to optimize your remittances and CRA tax obligations.
About Accountero
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.