If you are doing a business that is very small and are not directly involved in public dealings at large, a sole proprietor firm may be good for you. But certainly the benefits of running a business under the corporation is far better in contrast to sole proprietorship. The biggest advantage of having a corporation is the limited liability concept. Limited liability ensures that you will not lose anything more than you have invested into the business. Your personal assets are secured from any sort of claim. Yes, the cost of maintaining a corporation is somewhat higher but the benefits weigh more than the sole proprietorship.

Canadian law recognises broadly 5 types of corporations

•         Public Corporations: These are the corporations registered and resident in Canada whose shares are listed on a designated stock exchange in Canada such as TSE, TSX Venture Exchange, and The Montreal Exchange etc.
•         Corporations Controlled by Public Corporations: These are the private corporations owned or controlled by Public corporations. These are generally the subsidiary corporations formed by the big Public corporations and may have specific reasons.
•         Private Corporations: These are the corporations which are formed independently by the private residents in Canada and has nothing like of public corporations
•         Canadian Controlled Private Corporations (CCPC): This is one of the most common and important forms of corporation in Canada as there are a number of benefits that CRA provides to this form. These are generally the private corporations formed and resident in Canada. The CRA has a list of requirements that these corporations have to comply with for taking the benefits and remaining as CCPC.
•         Other Private Corporations: Any corporation which is not covered in the above comes under this category such as Non Resident corporation, crown corporations etc.

When you hire a person as an employee you have to deduct the income tax, CPP and EI contributions from the salary. On top of that you also have to add the CPP and EI portion from your own pocket which increases your costing. Whereas in sub contracts the work is done by the contractor and you need not worry about these factors. If you hire a person as an employee, you issue T4 to the person after filing it with the CRA and if you subcontract you issue a T4A slip to the sub-contractor. If your work involves the presence of the person in your premises and your observation it is always preferable to have an employee than the sub contract. If your work is flexible and can be done from anywhere you can avail the options for the sub-contractor.

The answer to this is not as simple as people ask this question as it depends on other factors like other sources of income if any, especially the salary from any other employer and the CPP and EI deduction. If you don’t have any other income even then this question is tricky and will have to be taken on an individual basis.

 The benefit of drawing a salary is considered as active income and is taxable at a lower rate of tax. Salary from the corporation makes you eligible to CPP and you get Pension after the age of retirement. Dividends on the other hand are taxable at higher rate and do not help you avail pension benefits, but dividends get tax credits in the personal hands which reduce the tax burden in your hands on the dividend income. Again the maths has to be done case to case basis.

When the Canadian corporation distributes a share of profits to the resident Canadian it is called dividend. A public corporation pays you eligible dividends. When it comes to Private Canadian Corporation, these Canadian Controlled Private corporations get the benefit of the lower tax bracket. If they have retained earnings accumulation from this lower taxed income and they pay a dividend out of these lower taxed accumulated retained earnings, this dividend is termed as ineligible dividend.

When the dividend is declared by a private corporation it is necessary for them to notify whether the dividend is ineligible or eligible.

To receive eligible dividends are always better than ineligible dividends. Although under personal hands the eligible dividends are grossed up at higher rates but the tax credits against the eligible dividends are way higher than ineligible dividends thus ultimately reducing the tax burden in the personal hands.

If you made any investments whether in property or shares or mutual funds or any other type. The difference between the net sale proceeds (sale proceeds less expense done for sales) and the adjusted cost base is either capital loss or capital Gain.

In Canada the 50% of the capital gain is exempt and the rest of the 50% is taxable.

For individuals only 50% of the total capital gains is taxable. It is included in your annual taxable income and taxed at your marginal tax rate

For corporations the payment of capital gains to the shareholders as Capital Dividend is possible only after adhering to section 83, Slip T2054 has to be filed for making payments out of Capital Dividend Account. This has to be filed either before the date of when the dividend becomes payable or the date of payment whichever is earlier.

If you run your personal vehicle for the business purpose you can claim expenses for the vehicle from the business. The CRA rules provide for the amount per km run to cover the cost of vehicle running. This amount is a consolidated amount and no further depreciation/amortization or insurance, or repairs done on the vehicle can be booked into the corporation. At present the tax exempt allowance from employer to employee can be 61 cents per km for the first 5000 Kms and 55 cents per km above the 5000 kms. The person claiming the reimbursement has to maintain a logbook for the kms run and must submit that to the corporation.

As per the CRA rules, if the vehicle purchased is passenger and it is not for the purpose of commutation of the staff the maximum amount of lease expense allowed for the write off is $900 before tax per month.

The vehicle that can be purchased for the business has broadly 2 categories

• ·         Commercial/Industrial Vehicle - There is no bar on maximum value for the purchase of the vehicle of this type and full amount paid as HST is available under ITC.
• ·         Passenger Vehicle- If the passenger vehicle is to be used for the business purpose, then the maximum value of the vehicle can be up to $34000/- from Jan 2022. Any value above this amount is disallowed by CRA and the corporation cannot avail the CCA on the above value. If the vehicle purchased is electric, then the max value of the vehicle can go up to $59000/-. ITC against the max value allowed as per CRA is available and any amount above cannot be taken as ITC. However, if the passenger vehicle is used for the purpose of staff commutation, then the above value restriction does not apply.

No, if the vehicle is to be used for the personal purpose it shall be brought under the personal name and not in the corporation. If the vehicle will be used occasionally for business purpose, then it is suggested to maintain the logbook for the kms run for the business purpose and allowance as per CRA rules can be reimbursed by corporation to the shareholders.

Yes, the corporation can have office in the residential property of the owners of the corporation. If the corporation is having the office in the personal property of the owners, it can pay to the shareholders the proportionate amount of the utilities or the amicable amount as rent for the use of the premises

The meals category includes expenses incurred in the consumption of food and beverages. Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, and room rentals such as for hospitality suites. As per the CRA guidelines generally 50% of the meals and expenses are allowed. There are some exceptions to this general rule:

Expenses for food and beverages consumed by a long-haul truck driver during an eligible travel period are deductible at 80%. The self-employed people doing cycle courier or rickshaw drivers can claim up to $23 per day. ( For full details see the article in knowledge portal on Deductibility of Meals and Entertainment).

The limit of 50% deductible is applicable on meals expenses incurred in travel also.

There is only one scenario where the life insurance premium paid is allowed as expenditure and that is when the premium paid is on life insurance policy that is collateral for the loan taken for the business.

Yes, the corporation can give loans to the shareholders and there has to be a resolution passed for such a purpose. The corporation shall have the agreement in writing with the terms and conditions for the repayment of the loan from shareholders with all the covenants of interest and security etc. The important point is loan shall be paid back to the corporation from the shareholder within one year else the same shall be treated as deemed dividend to the shareholders in their personal hands and they must declare it as the dividend received from the corporation.

Yes, the corporation can borrow money from the shareholders/owners with or without interest. If it is a short term loan it can be made without much documentation. But if it is long term and interest is payable on the loan to the shareholders, resolution for that shall be passed with specific terms and an agreement to that effect shall be made in writing.

If the owners of the corporation fail to repay the amount owing to the corporation, it shall be treated as deemed income in the personal hands of the shareholders and tax shall become payable by the shareholders on that dividend income

Yes, a corporation can take a loan from a non-resident individual or corporation but there must be supportive documentation to justify that the loan was taken for the business purpose. It shall be taken after the resolution passed in the duly convened meeting. An agreement to this shall be made with clear and understanding terms. It shall not be a shallow or money laundry entry or for the purpose of avoiding tax in the other country.

Yes, the corporation can give a loan to the non-resident. CRA does have an income inclusion factor for the loans given to the non-residents. If the loan is given at the interest rate lesser than the CRA prescribed, CRA takes the difference of the prescribed rate of interest and the actual rate of interest at which the loan is given as the interest inclusion income. There are some special exceptions to this rule where no interest inclusion will be done.

However the corporation has to take care of the lending requirements and regulations of the CRA. As per the section 17 Income Tax Act,  if the non-resident is a shareholder of the corporation and the loan is outstanding for more than one year it shall be treated as dividend to the non-resident and the same is eligible for the part XIII withholding tax @ 25%

Yes, a Corporation can give donations to the eligible charities and can claim deductions for the tax benefits.

Active income is the income earned for which you make efforts, input labor, spend time like Salary from job, Commission from service or profit from business, Freelancing income etc. Passive income in contrast is the income for which you don’t make any effort and it is generally generated from the income producing assets such as interest income, capital gains, Dividends, rental from properties, Limited partnership earnings from silent partnerships are some of the examples of the passive income. In Canada, passive incomes are taxable at a higher rate of taxes.

Yes, as long as the expenses are done for the purpose of the business and the expense receipts shall be available to justify the expenditure. Even if the expense is done from personal pocket, the corporation can reimburse the expenses subject to the production of the bills.

The payer is required to withhold 15% as tax from the payments for the fees, commissions or other amounts that have to be paid to non-resident individuals, partnerships or corporations for the services provided in Canada. The form to be used for filing with CRA is T4A-NR slip. Payment of withholding tax is governed by Part XIII of tax.

You have to give the recipient their T4A-NR slip and file your T4A-NR information return with the Canada Revenue Agency on or before the last day of February after the calendar year the information return applies to.

When you are making a payment to the Non Resident, it becomes the responsibility of the payer to deduct the

The CRA can assess a penalty of 10% of the required amount of tax you failed to deduct. If CRA assesses this penalty more than once in a calendar year it will apply a 20% penalty to the second or later failures.

Penalty for tax deducted but no/late remittance varies from 3% to 10% of the deduction amount. If the failure occurs again in the calendar year the penalty can go up to 20% of the deducted amount.

In addition to the above penalties, CRA will charge the interest as per the prescribed rates for the time being.

Generally, active business income is income earned from a business source, including any income incidental to the business. Income from a specified investment business or from a personal services business.

A specified investment business is a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties. But there is an exception when the Investment Income can be taken as active business income. When

•         The corporation employs more than 5 full time employees in the Investment business throughout the year, or

·         An associated corporation provides managerial, financial, administrative or other similar services to the corporation while carrying on the active business; and the corporation otherwise would have to employ more than 5 full time employees to perform these services if the associated corporation were not providing these facilities to the corporation.

CRA in normal circumstances can go up to 3 years back for the reassessment of the income. In some cases where the taxpayer is a mutual fund or corporation other than CCPC, CRA can go back up to 4 years. 

The period of 3 years or 4 years is to be calculated from the date of issuing of the notice of original assessment for the tax payable or date of sending notice that no tax is payable under the original assessment.

CRA in normal circumstances can go up to 3 years back for the reassessment of the income. In some cases where the taxpayer is a mutual fund or corporation other than CCPC, CRA can go back up to 4 years. 

The period of 3 years or 4 years is to be calculated from the date of issuing of the notice of original assessment for the tax payable or date of sending notice that no tax is payable under the original assessment.

The business can file the tax returns even after the arbitrary assessment is done by CRA. The return filed will supersede the earlier arbitrary assessment of CRA. Now CRA will compute the regular assessment based on the information provided by the business house and notice of assessment giving the details of tax, interest and penalty owing to the CRA by the person/business.

The maximum revenue from supplies threshold limit is $ 30000 in the last fiscal year or the current fiscal year up to which GST registration is not required.

As per the GST Act, the point of taxation is the enactment of supply. Supply is the delivery of goods or services by the vendor to the recipient against the consideration that may be in cash or kind.

The zero rated supplies are the supplies on which the rate of tax is zero and can be changed by CRA at any date. The registrants can avail the ITC against the zero rated supplies. 

Exempt supplies are the supplies which are kept out of the scope of GST collection. Meaning the person making exempt supplies does not charge the GST on the revenue collection and also the ITC is not available for the GST paid on the expenses/purchases made in the course of the exempt supplies business

The items below are examples of taxable supplies (other than zero-rated supplies):

• sales of new housing
• sales and rentals of commercial real property
• sales and leases of automobiles
• car repairs
• soft drinks, candies, and potato chips
• clothing and footwear
• advertising (unless provided to a non-resident of Canada who is not registered for the GST/HST)
• taxi or commercial ride-sharing services
• legal and accounting services
• franchises
• hotel accommodation
• barber and hairstylist services

This means that you do not charge GST/HST on these supplies, but you may be eligible to claim ITCs for the GST/HST paid or payable on property and services acquired to provide these supplies.The following services are zero rated supplies

• basic groceries such as milk, bread, and vegetables
• agricultural products such as grain, raw wool, and dried tobacco leaves
• most farm livestock
• most fishery products such as fish for human consumption
• prescription drugs and drug-dispensing services
• certain medical devices such as hearing aids and artificial teeth
• feminine hygiene products
• exports (most goods and services for which you charge and collect the GST/HST in Canada, are zero-rated when exported)
• many transportation services where the origin or destination is outside Canada

This means that you do not charge GST/HST on these supplies, but you may be eligible to claim ITCs for the GST/HST paid or payable on property and services acquired to provide these supplies.The following services are zero rated supplies

• basic groceries such as milk, bread, and vegetables
• agricultural products such as grain, raw wool, and dried tobacco leaves
• most farm livestock
• most fishery products such as fish for human consumption
• prescription drugs and drug-dispensing services
• certain medical devices such as hearing aids and artificial teeth
• feminine hygiene products
• exports (most goods and services for which you charge and collect the GST/HST in Canada, are zero-rated when exported)
• many transportation services where the origin or destination is outside Canada

Exports come under zero rated supplies and so ITC can be claimed against the export revenue.

 “A CRA Input Tax Credit (the “ITC”) is the sum or the allowable portion of the GST or HST paid on business-related expenses. A business, which can be all sorts of entities pursuant to subsection 123(1) of the Excise tax Act, is able to claim these ITCs on purchases and expenses that are for the use or supply of business activities”

ITC  known as Input Tax Credit is the tax paid on the products/services consumed and the capital goods purchased for use in the business operations with a motive to earn profit. For example

Goods purchased   amount    1000

HST paid on that @ 13%           130

Total amount paid                    1130

Out of this 130 is the amount of ITC and that is available for offset with the final tax payable to CRA for the tax collected on sales/services revenue.

In normal circumstances ITC is available for all the expenses incurred /goods purchased for running the business. The general condition is that you are registered business with the GST department and the expense is done for the purpose of business. However if your service/sales are exempt from the GST then no ITC is available. 

But in case of exports the revenue is zero rated meaning we do not collect GST/HST on that as the rate of tax in case of exports is zero and so we can claim the ITC and can get a refund of the GST paid on the expenses of business.

When taking ITC for the GST paid on the expenses/purchases the following things needs to be taken into account:

• The expenses are done solely for the business.
• We have the valid invoice mentioning the buyer and seller details, date of invoice, amount and GST number.
• We are not rendering any service that is exempt from GST.
• In case we are having both the taxable and tax free revenue, ITC on the expenses for the taxable business shall be taken.
• In case we can not calculate the non taxable and taxable portions exactly then it is suggested to take the proportionate amount of ITC on the basis of the sales for the taxable portion.

1. In case somehow the ITC was not availed earlier, the CRA rules provide the time limit during which the ITC can be taken in the next returns. The time limit for most of the businesses to claim the ITC is within 4 years from the end of the due date of the original return for which it should have been taken. 

For businesses whose turnover exceeds $6 million in either of the current year or last year are able to claim the earlier period ITC at the maximum of 2 years. Also the  Financial institutions can claim the ITC within the max period of 2 years from the due date of the original return.

1.  If the nature of business is one of service where most of the cost is labor and minimal amounts are involved as materials/operating costs or GST registered sub-contracts it is preferable to have a Quick Method of GST.

1. 1. As long as the business does not fall in the list containing ineligible businesses and the  revenue from world wide sales (including the zero rated supplies) and including the revenue of the associates does not exceeds $400,000  in  either of

   the first four consecutive quarters out of the last 5 quarters; 

   OR; 

   the last four consecutive quarters out of the last five quarters.

If your business does not fall in the following businesses, you are eligible to opt for QM under GST.

• • • persons that provide bookkeeping, financial consulting, tax consulting, or tax return preparation services in the course of the person's commercial activity
    • persons that provide legal, accounting, or actuarial services in the course of their professional practice
    • listed financial institutions
    • charities
    • public institutions
    • non–profit organizations with at least 40% government funding in the year (qualifying non–profit organizations)
    • municipalities or local authorities designated as a municipality
    • public colleges, school authorities, or universities, that are established and operated other than for profit
    • hospital authorities, facility operators, or external suppliers

For choosing in/out the QM of GST you have to file an election GST74 is to be filed with CRA.

The time limit for filing the option for QM of accounting under GST is 

For annual filers : It must be filed before the first day of the second quarter of the fiscal year. Eg the fiscal year ends on Dec 31 2021 . So the last day of filing GST74 will be April 1, 2022 for the fiscal year 2022

For Monthly filers: It shall be filed before the due date of filing the return for the month from which business wishes to opt for a quick method. Eg XYZ is a corporation who files monthly and from the month of July the corporation wishes to opt in the quick method. The corporation must file the election before 31 Aug i.e. the due date by which the GST return for the period is due.

You can not revoke the QM of GST until it remains in effect for at least one year after the election.

 If the tax payment for the last fiscal year was $3000 or more then the business is required to make the instalments to CRA in 4 equal quarterly amounts totaling equal to the last year tax payment. 

The threshold limit of $3000 is for the whole business including all the branches or divisions even if the branches or divisions are filing the returns individually.

The CRA does charge a rate of interest and it is prescribed at different times on the amount owed by the business to CRA. 

If the instalment of the tax is not paid in time or at the end of the return period the amount of GST payable is not paid in time the CRA charges interest for the shortfalls in the instalment payments or interest on the arrears.

CRA charges huge penalties for the late filings/non filings. The penalty for late filing is 1% of the amount owing plus the 0.25% of the amount owing for each month of delay up to maximum 12 months.

Those medical services are exempt where the services are consultative, diagnostic, treatment, or other health care services. The test for the exemption is whether the services qualify the health care supply or not. Most of the general health services of ortho, chiropractors, Dentists, optometrists, physicians etc are exempt from GST.

So any medical service  which does not comply with the health care supply is taxable eg- cosmetic surgery, Beauty services etc.