Guide on Tax Consulting and Advisory for Businesses in Canada
When it comes to tax consulting and advisory for businesses in Canada, many things need to be considered to ensure you make the most effective and efficient decisions for your company.
This detailed guide will help outline some of the most important aspects of tax consulting for Canadian businesses and provide some resources that will be helpful along the way.
If you’re looking for an overview on how to consult with a professional about taxes related to your business or want access to valuable tips and resources, this blog post is perfect for you.
We’ll cover topics such as understanding your obligations related to corporate income tax, Goods and Services Tax (GST), harmonized sales tax (HST), payroll deductions, and more.
The Basics of Taxes in Canada
The Canadian tax system is a progressive tax system, which means that people who earn more money pay a higher percentage of taxes than those who earn less.
In Canada, the federal government collects income taxes from individuals and then distributes the revenue to the provinces and territories. Each province and territory has its own income tax rates to fund provincial programs and services.
Canada also uses a progressive tax system on businesses. Corporations are taxed separately from their owners, which means that business owners pay corporate and personal income taxes on their profits.
Businesses can reduce their taxable income through deductions to arrive at net taxable income. Business deductions are managed through special schedules called T2s – separate schedules apply for non-profit organizations, Canadian-controlled private corporations (CCPCs), and other entities.
What is Tax Consulting?
Tax consulting helps Canadian businesses plan their tax strategies, maximize their refundable taxes, minimize the amount of taxes owed, avoid penalties and audits.
It should be noted that tax consulting does not mean tax evasion or avoidance. These are illegal activities, which should never occur in Canada. Instead, tax consultants use legal business expenses to minimize taxable income for self-employed individuals or own a small company.
This can often lead to higher refunds than would have been received if no actions were taken at all. Sometimes these additional monies result from lower corporate income tax rates for small companies, as mentioned above.
Tax consultants are often looked upon to determine if it is more beneficial to incorporate a business than remain unincorporated.
To decide which business structure is proper for you, it is vital to understand the differences in tax rates between small corporations and unincorporated individuals and the annual filing requirements. You should also be aware of potential pitfalls or traps when starting a new company, such as payroll compliance obligations.
Corporations can often be used solely as tax planning vehicles when there isn’t enough income to justify incorporation. However, doing so could place oneself at risk of being held personally liable for any debt that might occur within one’s corporation, which could result from negligent actions (i.e., personal guarantees).
As can be seen, there are many areas in which tax consulting can help businesses and their owners.
What Does a Tax Consultant Do?
A tax consultant helps businesses and individuals understand and comply with federal, state, and local tax laws. They can assist with preparing tax returns on behalf of their clients.
Some tax consultants also offer consulting services for estate planning, business planning, and other financial matters. By working with a qualified tax consultant, businesses and individuals can save time and money by ensuring that they comply with all relevant tax laws.
Here are some of the services a tax consultant can provide:
- Prepare individual and corporate income tax returns for individuals, corporations, partnerships, trusts, estates, self-employed individuals, pensioners.
- Assist with filing extensions.
- Help you understand your business expenses.
- File sales tax returns for your state or province.
- Complete payroll forms.
- Organize bookkeeping systems. This can be done online (let’s say while paying bills via internet banking) or in-person (while meeting face to face) at their office. There is no charge to use these programs once you have purchased them. However, there may be additional features or technical support charges.
- Business valuations and buy-sell analysis.
- Assist with understanding the sale or distribution of a business interest.
- Estate and trust tax compliance
Who Needs a Tax Consultant in Canada?
A company’s income taxes are determined by its tax status. Some businesses are considered “flow-through” entities because the profits are passed on to their owners, who then pay personal income taxes on that money.
By contrast, some businesses have elected for special treatment under the Canadian Income Tax Act to be taxed differently than individuals. These include corporations, trusts, estates, partnerships, or limited liability companies (LLCs).
For example:
- A corporation might find it more beneficial to pay dividends out of current income rather than reinvesting all earnings into the business to grow.
- An individual who is ill or over age 71 may need to reduce taxable income for this year. He could give his children shares in the family business, which would provide funds for them now even though they are not legally entitled to claim the money until later when he dies.
- Trusts can be set up so that beneficiaries will receive certain amounts of money at specific times in their lives, minimizing tax exposure for everyone involved.
Self-Employed Individuals
A self-employed person is an independent contractor who provides services and sells goods on a commission basis. She may also be a sole proprietor who sells goods through her own business.
The Canada Revenue Agency requires self-employed individuals to pay taxes quarterly through an electronic funds transfer or mailing their payments with pre-printed cheques.
They are generally required to make estimated tax payments during the year. It is difficult to determine how much they will owe until the end of the calendar year when they have more information about sales and expenses.
Trustees for Estates
Trustees are responsible for managing assets that have been placed into trust for someone else’s benefit. When these assets generate income, trustees must report this revenue on behalf of whoever the assets belong to (usually a minor child). Each province has its own rules for family trusts and estate trustees.
Partnerships
Partnerships operate as a business entity instead of an individual or corporation. Certain provinces require partnerships to file separate income tax returns from their members. In contrast, other provinces allow them to file one return together with the share of any net income they wish to pass on to each partner.
Corporations and Corporate Trusts
A “corporation” is a legal entity that we think of, like Apple Inc., McDonald’s Corporation, etc. A corporation has no life beyond its ability to buy and sell goods or services according to the terms of its governing documents (the certificate of incorporation), so it issues or enters into contracts in its own name.
“Corporate trusts” are used when one company wants to hold assets and carry on business for another company (the “beneficiary”).
The trust is legally separate from the beneficiary, so it doesn’t have any obligation to consider the latter’s interests or be accountable for its actions, but they cannot claim as corporations can. Instead, they usually refer to shareholders of a corporation if they want money from that corporation.
Limited Liability Companies
An LLC is a relatively new business structure in Canada that some provinces have adopted but not others. In general, an LLC is treated as a corporation for tax purposes unless elected otherwise. Since they are taxed like a corporation, this also means that profits flow through to the owners, who will pay personal income taxes on that money.
Like corporations, LLCs must file detailed financial statements with the government each year and may need to present audited reports if they exceed the minimum in liabilities.
Partnerships Are Not Taxable Entities
They are merely a collection of partners. The partnership itself makes no filing – only the individual partners are taxed. A Partnership Agreement dictates how profits or losses are divided up between members.
Sole Proprietorships
Sole Proprietorships generally do not have any filing requirements other than providing documentation to prove which expenses they can deduct from their revenue to generate net income.
How Much Does a Tax Consultant Cost?
The cost of hiring a tax consultant will largely depend on the type of work you need to be done. A single income tax return, for example, would be significantly cheaper than an incorporated business with several employees and multiple filings annually. Be sure to ask about fees upfront, so there are no surprises when it comes time to pay your bill.
What is the Difference Between a Tax Accountant and a Tax Consultant?
A tax accountant or bookkeeper is responsible for recording day-to-day transactions within your business and ensuring they accurately reflect what is happening in your company’s books. They also play an integral role in filing accurate returns and remitting any associated taxes.
On the other hand, a tax consultant is someone who provides in-depth advice on how to make the most of your income and deductions. They can also suggest ways to reduce or defer taxes, though they cannot file a return on your behalf.
The Benefits of Hiring a Tax Consultant for Your Business in Canada
Tax advisors or consultants can help you reduce your business income tax liability in Canada.
Businesses in Canada are subject to both federal and provincial income taxes. The tax rates vary by province and the type of business entity you operate as (sole proprietorship, partnership, corporation).
A tax consultant can provide advice on the most appropriate structure for your business and can assist with completing the necessary paperwork to register your business with the Canada Revenue Agency (CRA).
Once your business is registered, a tax consultant can help you file regular returns and take advantage of available deductions and credits. They can also advise you on planning future payments such as corporate income taxes, property taxes, and sales taxes.
A tax consultant can save your business a significant amount of money by planning and taking advantage of current tax law.
An experienced tax consultant will be aware of the latest changes to Canadian taxation law and any available exemptions or credits that may apply to your specific industry. They can help you take advantage of these changes to maximize the benefit for your business.
A tax consultant will also assist you with international businesses, including those who have U.S. connections.
The U.S. Internal Revenue Service (IRS) is one of the most complex taxation systems globally, and an accountant who specializes in cross-border issues can help ensure you remain compliant with both Canadian and American requirements at all times.
In Canada, a “tax preparer” is not a regulated term. Anyone can prepare your return. However, to represent you before the CRA (and in court if necessary), they must be authorized by the Canada Revenue Agency to do so. Not all tax preparers are authorized to represent their clients – only “authorized representatives” hold that authority.
To ensure that your interests are protected at all times, make sure you use an authorized representative when filing your taxes!
When hiring a Canadian tax consultant, it is crucial to find one with experience dealing with businesses similar to yours. A large accounting firm may not be sufficiently familiar with the needs of smaller local enterprises.
It is also essential to check whether your accountant is registered with H&R Block Income Tax Service or other professional associations.
If you use an unregistered tax preparer, the CRA may decide to pursue you for any understated taxes. If it is determined that an unregistered preparer filed your return, they can be fined or even jailed! This is why you mustn’t hand over your income tax return before first checking that your tax consultant has all of the necessary credentials and expertise.
The bottom line is to make sure you hire a registered representative authorized by the Canada Revenue Agency to represent taxpayers before them! You want someone who knows how to keep up with changes in Canadian taxation law, will find all available deductions for you and ensure that you are paying as little as possible in taxes.
Taxation Guide for Businesses in Canada
Businesses in Canada must comply with some taxation regulations.
Legal System
The legal system in Canada provides a framework for the taxation of businesses. Businesses are taxed on income earned in Canada and on certain capital gains realized on the sale of assets used in the business. Several deductions and credits are available to businesses to reduce their tax liability.
Businesses are subject to federal and provincial taxes, but only income earned in Canada is taxable. Income earned outside of Canada is not subject to Canadian taxation, with a few exceptions. For example, income from a Canadian business earned through an intermediary located in another country may be subject to Canadian taxation.
Capital gains realized on the sale of assets used in a business are generally taxable unless sold as part of the business.
Taxation Authorities
There are three levels of government in Canada responsible for taxation: federal, provincial, and municipal.
The federal government is responsible for income tax, corporate income tax, goods and services tax (GST), customs duties, and excise taxes. Provincial governments are responsible for personal income taxes, property taxes, retail sales taxes, and fuel taxes. Municipal governments are responsible for property taxes and retail sales taxes.
The Canada Revenue Agency (CRA) is the federal agency responsible for administering all federal taxation laws in Canada. The CRA issues income tax, corporate income tax, GST/HST, excise duties, customs duties, and immigration enforcement laws. The CRA’s mandate is to administer these laws fairly and equitably.
The provincial and territorial tax authorities administer the personal income taxes, property taxes, and retail sales taxes in Canada. Provincial and territorial governments set their own tax rates within a federal framework. The cities or municipalities that collect property taxes may do so at different rates than the provincial rate.
Business Vehicles
Businesses can be structured as sole proprietorships, partnerships, corporations, unlimited liability corporations (ULCs), foreign corporations with a Canadian branch, or branches of non-resident corporations.
Partnerships: A partnership is not a legal entity and thus does not pay income taxes on its behalf. Instead, each partner is taxed directly on their proportional share of the partnership’s profits and losses (i.e., the business’s income).
Each partner files an individual income tax return, reporting their respective business income or loss shares depending on their percentage interest in the partnership (typically determined by capital contributions made to establish the partnership).
The partners must agree on what portion of each share will be allocated for payment to that member (usually done at year-end when preparing K-1s). If all partners are individuals, the partnership is not required to file an annual income tax return.
Corporations: A corporation can be either taxable or exempt. A tax-exempt corporation does not have to pay corporate taxes on its profits. Still, it cannot distribute dividends to its shareholders in cash or other assets (i.e., this type of distribution would result in a deemed dividend).
To remain tax-exempt, corporations must meet certain conditions for exemption.
Taxable corporations are taxed on their worldwide income at the federal and provincial rates corresponding with where they are considered a resident for taxation purposes. To be considered taxable in the province where they are resident, corporations must satisfy one of two thresholds:
- If the corporation has any employees at any time in a year (even one), then it is taxable on its worldwide profits; or
- If the corporation does not have any employees during the year but has more than the required minimal total gross revenue in either the previous fiscal period or current fiscal period, then it is taxable on its worldwide profits.
A branch of a non-resident corporation that operates in Canada is taxed similarly to an incorporated business for income tax purposes. However, if no permanent establishment exists in Canada, the branch is not subject to Canadian withholding tax on interest or dividends paid out to the foreign parent.
Unlimited Liability Corporations (ULCs): A ULC is a corporation with unlimited liability for all of its debts and obligations, similar to a sole proprietorship in this respect, i.e., personal assets can be seized to pay business liabilities in certain circumstances.
A ULC is usually used as a holding vehicle for passive investments such as real estate or other types of investment properties where there would be little or no liquidity available directly from the entity itself, but instead through selling its underlying properties over time.
A ULC is frequently used as a vehicle for holding and managing rental properties and does not usually pay tax on any income it earns. If there is a profits distribution (i.e., cash distribution) to shareholders in the form of interest or dividends, these payments will be taxable as if a corporation paid them out.
Foreign Corporations: A foreign corporation with no subsidiary corporations in Canada and carries on business in Canada through an agent must register as a non-resident concerning its Canadian businesses.
For income tax purposes, a foreign corporation resident in Canada is fully taxable on its worldwide income. This means this entity cannot claim the same deductions, expenses, and exemptions as domestic corporations and can even be subject to branch tax if it does not have a permanent establishment in Canada.
This is different from the rules for foreign corporations, where all income is taxable as business or property income, and they cannot claim any non-business/non-property deductions.
Financing a Corporate Subsidiary
There are a few different ways for businesses in Canada to finance a corporate subsidiary, and the most appropriate method will vary depending on the specifics of each company. Here is a brief overview of some of the most common ways:
Debt Financing: Loading up the subsidiary with debt is often the most straightforward way to finance it. This can be done by either taking out a loan or issuing bonds. The advantage of debt financing is that it’s relatively low-risk. The lender can seize the subsidiary’s assets if it fails to repay its loans.
The downside is that interest payments can be pretty expensive, and there is always the risk that something could go wrong and the subsidiary would be forced to declare bankruptcy.
Equity Financing: This involves selling shares in the subsidiary to external investors, either by issuing company stock or having an initial public offering (IPO). The advantage of equity financing is that it does not usually require any additional loans. The investment funds buy out existing shareholders rather than borrowing money from a bank.
However, it can still be quite expensive, especially if you have to seek outside investors or hire an underwriter to help you through the IPO process. This option could also leave your business open to hostile takeovers if done wrong.
Hybrid Models: Another option is to combine debt and equity financing for your subsidiary. For example, you might issue bonds with fixed annual interest rates and a defined repayment schedule and use the cash flow from the subsidiary to pay off those debts.
This would be like taking out a personal loan where you make interest-only payments for five years and then start repaying capital (i.e., principal) at the end of that time.
Corporate Income Tax
The corporate income tax in Canada is a federal tax imposed on Canadian corporations’ profits. The corporate income tax is payable by corporations on their taxable income for the year.
Taxable income for a corporation includes all of the corporation’s income, less any amounts that are deductible to calculate that income. Generally, a corporation can deduct costs incurred in earning its taxable income.
Specific costs that can be deducted include wages, salaries, and commissions paid to employees, interest expenses, rents paid, and amounts paid to purchase or produce goods and services used in carrying on a business.
To calculate its taxable income, a Canadian corporation must determine its income from a business, capital gains, and property before making any deductions. In addition, the corporation determines whether it is a graduated rate taxpayer.
If the corporation does not qualify as a graduated rate taxpayer or no taxable income can be determined, the aggregate method calculates the tax payable on the taxable income for a taxation year.
Cross-border Payments
Cross-border payments are payments between businesses in different countries. When making cross-border payments, there are several factors to consider, including tax implications. In general, businesses must pay income tax on profits earned from cross-border activities, regardless of the country in which those profits are made.
There are a few exceptions to this rule. For example, suppose a Canadian business earns income from selling goods or services to customers in the United States. In that case, that income may be exempt from Canadian tax under the North American Free Trade Agreement (NAFTA).
Similarly, there may be tax treaties between Canada and other countries that apply to cross-border transactions. Generally speaking, if a Canadian business earns income from selling goods or services in another country, we recommend consulting with a professional before concluding whether foreign income will be subject to Canadian tax.
Payroll Taxes
In Canada, there are three types of payroll taxes that businesses must pay:
CPP (Canada Pension Plan): This tax-funded pension plan pays retirement, disability, and survivor benefits. The CPP contributions are based on a percentage of your employee’s gross salary or net self-employment income.
E.I. (Employment Insurance): This social insurance program provides temporary financial assistance to workers who lose their job, become ill, or are injured. E.I. premiums are based on a percentage of your employee’s gross salary or net self-employment income.
Federal Tax: This is a tax imposed by the federal government on businesses’ taxable income. It is calculated as a percentage of your business’s net income. This tax is called the gross federal tax, and it includes both your corporate income taxes and any provincial income tax.
Indirect Taxes
There are several indirect taxes that businesses in Canada need to be aware of: goods and services tax (GST), harmonized sales tax (HST), and provincial sales taxes (PST), just to name some. These taxes are levied on the purchase of goods and services.
Businesses can claim input credits for the GST or HST paid on goods and services used in their business. This reduces the amount of tax they pay on their taxable income. Companies must charge and remit the GST or HST to the government on taxable goods and services sales.
Goods and Services Tax: The Goods and Services Tax (GST) is a tax that applies to the sale of most goods and services in Canada. Generally, businesses must charge GST on the fair market value of the goods or services they provide. This rule has some exceptions, including exports and certain financial services.
Businesses registered for GST must file regular returns reporting the amount of GST collected on their sales. Registrants can claim a credit for the GST paid on business expenses and inputs, which can help to reduce their overall tax liability.
Harmonized Sales Tax: A harmonized sales tax (HST) is a consumption tax that combines the federal GST with provincial sales taxes into one single tax payable to the government by consumers and businesses in Canada’s provinces and territories.
This allows businesses to reduce their compliance burden. They only need to deal with one HST return instead of multiple returns for each province or territory where they operate commercially. Businesses must register and collect HST on their taxable goods and services in the participating provinces and territories.
As long as it’s for commercial use, they can claim input credits equal to 100% of the tax paid on the property, such as computers, business equipment, industrial machinery, etc. Businesses must charge and remit the HST to the government on taxable goods and services sales.
Provincial Sales Tax: Businesses in Canada are subject to provincial sales tax (PST) and the federal Goods and Services Tax (GST). The rates and rules vary by province.
The PST is a value-added tax charged on goods and services. Businesses must collect the PST from their customers and then remit it to the government.
Land Transfer Tax: Land transfer tax (LTT) is a provincial tax in Canada levied on the purchase or acquisition of land or an interest inland. The tax applies to properties located in provinces and territories where the tax is collected.
The LTT rates vary by province. A surtax also applies to properties valued over a certain amount.
Businesses should be aware of these rates when purchasing property in Canada, as the tax can add up quickly! It’s essential to ensure you have the costs covered in your purchase price.
Proposed Extension of GST/HST to eCommerce: The Canadian government proposes extending the GST/HST to eCommerce. This would mean that online purchases would be subject to sales taxes as in-store purchases.
There are pros and cons to this proposal. On the one hand, it would create a level playing field between online and in-store shopping. On the other hand, it could increase prices for online shoppers and cause some businesses to move their operations offshore to avoid taxation.
How to Find the Best Tax Experts Near Me?
You can do a few things to find the best tax consultants near me in Canada. First, make sure they are registered with the CRA and have the appropriate certification and licensing. You can check this on the CRA website.
The next step is to ask your friends and family for referrals. They may have used a tax consultant in the past and recommended someone they had a positive experience with.
The next step is to search for “tax consultants near me in Canada.” This will give you a list of local tax consultants who provide services in your area. Once you’ve compiled a list of potential candidates, it’s essential to compare their rates and services.
It’s also essential to read online reviews before making a decision. This will give you an idea of what other people have said about the tax consultant near me services. Finally, ensure that you get a quote upfront, so there are no surprises when filing your taxes.
Why Hire JTT Accounting for Tax Consulting and Advisory in Canada?
There are many good reasons to hire JTT Accounting for Canada’s tax consulting and advisory needs.
First and foremost, our team of experienced professionals has a deep understanding of the Canadian tax system and all the latest changes to the law. We’re also up-to-date on the latest technologies and software used in tax preparation, so you can be confident that your taxes will be prepared accurately and efficiently.
But that’s not all. We believe in providing our clients with value-added services, so we offer a range of additional services such as bookkeeping, business consulting, and estate planning.
And we’re always here to answer any questions you may have about taxation or accounting. We want to ensure you have the information you need to run your business effectively and efficiently.
So, if you’re looking for a team of experienced professionals who are ready to help your Canadian business succeed, then JTT Accounting is the right choice for you!