Whether you intend to have an accountant handle your taxes or you plan to take care of them yourself, it’s a good idea to take some time to learn how taxation in Canada will apply to your business, including GST/HST, income tax, employee source deductions, and the Canada Pension Plan.
Goods & Services Tax/Harmonized Sales Tax
Do you need to collect this tax from customers?
Canadians pay the goods and services tax (GST)/harmonized sales tax (HST) on most goods and services. So you’ll probably need to charge GST/HST on what you sell, unless what you are selling falls into a zero-tax category (which includes things like basic groceries, music lessons, child care and certain agricultural products). You can visit the Canada Revenue Agency (CRA) website to learn more about GST/HST applicable products and services.
HST is levied in provinces that have harmonized their provincial sales tax with the GST—known as ‘participating provinces’. These are New Brunswick, Nova Scotia, Newfoundland and Labrador, Ontario and Prince Edward Island. Other jurisdictions may charge a tax in addition to the GST.
Check the CRA website to learn about GST/HST rates applicable to your province.
Collecting and remitting the tax
If your business revenue exceeds $30,000 per year you must register to collect and remit the GST/HST on sales of applicable products and services. You can also register voluntarily to collect and remit the tax if your business revenue is below $30,000.
GST/HST registrants must meet certain responsibilities. You must file returns on a regular basis, collect the tax, and remit any resulting net tax owing.
The amount of tax you will pay depends on your form of organization and income level. For example, as a separate legal entity, a corporation will pay a certain amount of income tax on its profits. Meanwhile, a sole-proprietor will be taxed based on the amount of taxable income he or she generates.
It can be challenging to save enough money to pay your taxes because you won’t know exactly how much money you owe until you complete a year-end return. Some self-employed Canadians put aside between 30 to 40 per cent of their income for tax. That way, you may have a little more in your account than you may actually need to pay in taxes.
Employee source deductions
If you plan to hire employees, you will have to remit Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax deducted from your employees' income, along with your share of CPP contributions and EI premiums.
Canada Pension Plan (CPP)
If your net income from your business is more than $3,500 you’ll have to start paying CPP at double the rate you would if you were an employee. For more information about CPP and self-employed individuals, go to the CRA website.
Other tax tips
Hire an accountant
A good small business accountant will help you discover tax deductions that you might otherwise miss. Plus, as a key advisor, you can turn to your accountant for financial advice and business strategy.
Keep your receipts
Self-employed Canadians are more likely to be audited, so make sure you keep your receipts and other documentation to support your business expenses. Remember, expenses must have been incurred to help you earn your income.
Separate your records
Try to separate your personal and business items, such as bank accounts or credit cards, for ease of administration and to take advantage of different rules.
This information is presented for educational purposes only and should not be considered as tax advice. Be sure to consult with a qualified tax specialist to obtain tax advice specific to your business or personal situation.