Start Up Planning TIPS
Tax Planning Strategies Based on Your Business Structure
Once an entrepreneur has established its new business structure, it is crucial to understand the basic taxation requirements for said business structure, as failing to comply with tax regulations could result in costly fines and legal penalties.
For Sole Proprietors, income (or loss) is reported on their personal income tax return, and may also be required to make instalment payments for Canada Pension Plan (CPP) contributions on their own personal income. In addition, if in Canada and the yearly business revenue from taxable supplies or service are projected to exceed $30,000, a Sole Proprietor must register for the Goods and Services Tax/Harmonized Sales Tax (GST/HST).
Partnerships, on the other hand, require that each partner include their proportionate share of the partnership income or loss on their respective personal income tax return. Partnerships may also be required to make income tax and CPP contributions as instalment payments, and like the Sole Proprietor if sales projections are more than $30,000 in yearly revenue, they too must also register for and collect GST/HST if they provide taxable supplies and services in Canada.
Corporations, except tax-exempt Crown Corporations, Hutterite Colonies, and Registered Charities, are required to file a corporation income tax return (T2) every tax year, even if no tax is payable. Non-profit Organizations, Tax-Exempt Corporations, and Inactive Corporations are also required to file a T2 return. This corporate structure offers lower tax rates, possible tax exemptions, deductions, and income splitting, among other tax-saving benefits. A qualified tax accountant can help leverage these advantages and potentially design a legal tax shelter through a series of trust structures.
Start-Up Planning Tip
Although each business structure has its own distinct upfront setup costs, with some being more expensive than others, entrepreneurs should contemplate the added benefits of a corporate structure including long term tax savings from applicable unique tax-deductible expenses, lower income tax rates, additional tax planning options, and reduced overall personal liability risk.
It is highly recommended that business owners consult with a reputable tax accountant to gain a complete understanding of their tax obligations and opportunities for tax optimization based on their specific business structure. With the right guidance and proper planning, businesses can stay compliant and minimize their tax burden, ultimately leading to increased profitability and personal success.
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