You pay income tax, goods and services tax (GST), and capital gains tax when you are an employee. But when you are a business owner, you pay several other types of taxes. These business taxes include employment tax, sales tax, property tax, excise tax, self-employment tax, service tax, and corporate tax. You need to pay these taxes for smooth business operations and to avoid regulatory action against your business.
In this article, we will discuss why, when, and how should you pay business taxes? We will also discuss the penalties your business could face for failing or avoiding paying these taxes.
Why Should You File and Pay Business Taxes?
Every business owner finds filing and paying taxes a burden. There is a common misconception that no profit means there is no need to file taxes. But you need to file returns even if your business didn’t earn any revenue. This is generally the case with start-ups, sole proprietorships, or partnerships. There is often no revenue in the first few years, but there is a business expense. You can write off this expense against your personal income, thereby reducing your personal tax bill.
If you file your taxes regularly on time, you can avail the many cash and tax benefits the Canada Revenue Agency (CRA) offers. For instance, the CRA introduced many COVID-19 benefits like Canada Emergency Business Account (CEBA) for businesses that filed their tax returns.
If you file business taxes regularly, it becomes easy for you to secure funding and get the necessary permits to expand your business. It also makes it easy to sell your business, as the acquiring company will do financial due diligence under which it will also check your tax dues. These many indirect benefits make all the efforts in filing and paying taxes worth it.
When Should You File and Pay Business Taxes?
While it is important to pay business tax, it is equally important to pay it on time. For that, you need to know the tax deadlines.
If you run a sole proprietorship or partnership business, the last date to file income tax returns is June 15. However, if you have any previous tax dues, you should clear your tax bill by April 30 to avoid CRA penalty.
If you are an incorporated business, your tax deadline depends on the fiscal year you choose. You have to pay corporate income tax within six months of your corporation’s fiscal year-end. However, if you have any previous dues, you should pay them within two months of the fiscal year-end. You get an extra month to clear your dues if you are a Canadian-controlled private corporation (CPCC) with an annual business income below $50,000.
What If You Don’t File and Pay Business Taxes on Time?
It is always in the best interest of your business to pay all the taxes before the due date. But if you delay or fail to pay taxes, your business can face hefty penalties.
The federal government charges interest on the unpaid tax amount. If you owe tax and delay your filing, the CRA will also charge a late-filing penalty. The CRA charges a 5% late filing penalty on the balance owed plus 1% for every month you delay your tax filing up to 12 months. If you delay the tax filing by several years, the penalty can increase to 10% plus 2% for each month you delay your returns to a maximum of 20 months.
Even if you do not have funds to pay the taxes, file your return before the deadline to avoid this late filing penalty. You can make a partial payment of the taxes and apply for interest relief. If your business does not clear its tax dues, the government can seize business property such as machinery, equipment, and cars to clear tax obligations. It also means that the government will be paid first from the sale of the assets if your business goes bust.
If you don’t file returns or wrongly report income or expense, it is considered a criminal offence. It can attract jail time and court-imposed fines. And if the word leaks out that your business evaded taxes, it will harm your business’s goodwill.
What Documents Do You Need to File Business Tax?
As a business owner, you must keep valid documentary proof of all incomes and business expenses. Your bank or credit card statements do not count as valid documents. The valid document includes sales invoices, fee statements, contracts and receipts that state the transaction details (amount, description, date), contact details and business number of the seller and buyer. The CRA requires you to keep all the business records (in digital or physical format) for the last six years in case of an audit.
Once you have the documents, it is time to file the tax return. A sole proprietor and partnership business is required to file the T1 personal income tax return. A corporation is required to complete and file the T2 Short Return form.
What Deduction and Credits Can You Claim to Reduce Your Business Tax?
You can claim several tax deductions and credits when filing corporate income tax returns. Here are some of the common business expenses you can deduct to reduce your tax bill.
- Scientific Research and Experimental Development (SR&ED) tax credit
- Business-use-of-home expenses
- Office expenses
- Capital cost allowance
- Advertising expenses
- Vehicle business expenses
- Travel-related business expenses
Learning about all the business taxes and the process of filing and paying these taxes can take you forever. A tax consultant can also help you file your returns and take advantage of the various tax benefits the government offers small businesses. Leave the taxing job of doing taxes to a tax consultant and utilize this time to focus on your business.
Contact Glenn Graydon Wright LLP in Oakville for Trusted Tax & Business Advisory
At Glenn Graydon Wright LLP, our team of financial and business consultants can assist you in planning and filing your business taxes. The highly skilled accountants at Glenn Graydon Wright LLP regularly provide accounting, business advisory, and tax advice for small and mid-sized businesses. To learn more about how we can help you, contact us online or telephone at 905-845-6633.