Frequently Asked Questions

• All corporations, non-profit, tax exempt and inactive corporations, have to file a tax return EACH year even if there is no tax payable! It is a criminal offense not to file.
• A non-resident corporation has to file a T2 return if, at any time in the year, it carried on business in Canada, it had a taxable capital gain, or, in some cases, it disposed of taxable Canadian property. 

• File your corporate income tax return within six months of the end of each tax year. 
• The tax year of a corporation is its fiscal period. 
• When the corporation’s tax year ends on the last day of a month, file the corporate income tax return by the last day of the sixth month after the end of the tax year. 
• When the last day of the tax year is not the last day of a month, file the corporate income tax return by the same day of the sixth month after the end of the tax year.

You can deduct expenses for telephone and utilities such as gas, oil, electricity, water and cable, if you incurred the expenses to earn income. 

The amount you can deduct in a given year for any expense depends if it is considered a current year expense or capital expense. 

• Corporations have to pay corporate income tax in monthly or quarterly instalments when the total of the taxes payable for either the previous year or the current year is more than $3,000.
• The balance of tax the corporation owes for a tax year is due within either two or three months of the end of that tax year, depending on the circumstances of the corporation. 
• If you are a Canadian Controlled Private Corporation (CCPC) and are claiming the small business deduction (and a few other criteria) you can pay three months after your year end.
• The tax department considers the payment to have been made on the day they receive it, and not on the day you mail it.

• If you’re a business owner in one of these provinces and your annual sales/ or income are/is $30,000 or more, you must register for GST/HST. Once you have a GST/ HST number, you collect the GST/HST and remit it to the CRA based on your reporting period.
• If you are a self-employed taxi driver or a commercial ride-sharing driver (e.g., Uber driver), you must register for a GST/ HST number from the date you start your business.
• There are some businesses with zero-rated sales-tax (e.g., basic groceries and certain medical devices or exempt products/services such as legal aid services, music lessons, child care services or financial services). Zero rated services can register for a GST/ HST number. They do not collect GST/HST, but they can still register for GST/HST if their income is less than $30,000. They pay GST/HST on expenses and claim them as input tax credit, resulting in a refund situation.
• Businesses under the exempt category can not claim GST/HST paid on goods/services and thus are, not required to register.

• The CRA chooses a file for an audit based on a risk assessment. 
• The assessment looks at a number of factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. 
• Information not consistent with other similar files or other audits or investigations.

• If you don’t owe additional taxes: There are no penalties for missing the deadline. But it still makes sense to file early: you can get your refund sooner and use the money to pay off debt, invest or spend.
• If you owe additional taxes: You could be subject to late-filing penalties for missing the deadline. Even if you can’t pay your tax bill immediately upon filing, it still makes sense to meet your deadline, as you’ll avoid the initial late-filing penalties. 

• A T4 slip shows the income you earned when you worked for an employer. A T4A, on the other hand, is a record of your earnings from being self-employed. 
  
• While the T4 includes the Canada Pension Plan (CPP) and Employment Insurance (EI) deductions, the T4A doesn’t. So you’ll need to file those yourself separately. 

• You have to make instalment payments if you have a tax bill of over $3,000.” 
• This means that the amount of net tax you owe or would end up owing at the end of the tax year exceeds $3000; $1,800 for residents of Quebec 

The decision between receiving a salary or dividend as a shareholder depends on various factors, including the specific circumstances of the company and the individual shareholder's financial goals and needs. Here's a comparison of salary and dividend from a shareholder's perspective:

1. Salary:

• Guaranteed Income: A salary provides a steady and predictable income, which can be essential for shareholders who rely on their investment in the company as their primary source of income.
• Employment Taxes: Salaries are subject to employment taxes, including income tax and payroll taxes. Shareholders receiving a salary will have to pay these taxes, reducing their net income.
• Deductible Business Expenses: Shareholders receiving a salary may be able to deduct certain business-related expenses, reducing their overall tax liability.
• Retirement Benefits: Salary payments may make shareholders eligible for retirement benefits like a RRSP or pension plan if the company offers them.

2. Dividend:

• Tax-Efficient: Dividends are typically taxed at a lower rate than salary income, especially for qualified dividends. Shareholders may benefit from lower tax liabilities when receiving dividends.
• Passive Income: Dividends are considered passive income, which can be advantageous for shareholders who don't want to be actively involved in the day-to-day operations of the company.
• No Employment Taxes: Dividends are not subject to payroll taxes like Social Security and Medicare taxes. This can result in lower overall taxes compared to a salary.
• Shareholder Control: Shareholders who prefer not to be actively involved in the company's operations may find dividends a more hands-off way to benefit from their ownership.

In summary, the choice between a salary and dividend for a shareholder depends on their financial situation, tax considerations, and personal preferences. Some shareholders may prefer the stability of a salary, while others may opt for dividends for tax efficiency and a more passive income stream. 

It's essential to consult with a tax professional or financial advisor to make an informed decision based on individual circumstances and objectives.

Starting a business can be overwhelming for first time entrepreneurs. Small Business Services is your information connection and will help you from start to finish.

When starting your business, choose the business structure that best suits your needs. There are four types of business structures in Ontario: sole-proprietorship, partnerships, corporations and cooperatives.

There are different types of corporations for tax purposes, and you have to select the one that accurately describes your corporation type at the end of the tax year. 

The corporation type determines whether or not the corporation is entitled to certain rates and deductions. Make sure you know which type applies to you:

• Canadian-controlled private corporation (CCPC)
• Other private corporation
• Public corporation
• Corporation controlled by a public corporation
• Other corporation

A change of corporation type may result in significant tax consequences. 

For example, certain calculations on the return depend on whether the corporation was a private corporation or a Canadian-controlled private corporation (CCPC) throughout the tax year, at any time in the tax year, or at the end of the tax year.

The SBD reduces the corporate income tax that a corporation would otherwise have to pay in a taxation year throughout which it was a Canadian-controlled private corporation (CCPC).  

A CDA is a notional account that keeps track of various tax-free surpluses accumulated by a small business designated as a Canadian controlled private corporation, or CCPC. Those surpluses can be paid out as tax-free capital dividends to shareholders.

A corporation’s CDA balance can include:

• Capital gains and losses
• Dividends received from another company
• Proceeds from a life insurance policy in excess of the Adjusted Cost Base of the policy
• Gains and losses on the sale of some fixed assets

The Refundable Dividend Tax On Hand (RDTOH) account is a mechanism in the tax system that refunds a portion of tax when taxable dividends are distributed to shareholders. 

Passive investment income is subject to a higher tax rate than active business income in a business; to alleviate this, a refund is available on part of that tax when the corporation pays taxable dividends to shareholders (refundable portion of Part I tax). This only applies to Canadian Controlled Private Corporations.

RDTOH is generated when a corporation pays tax on investment income and when it pays tax on dividends received in Part IV. A refund is available for all or part of the RDTOH at the end of the tax year if taxable dividends are paid. 

Corporations can view there balance by logging into “My Business Account” on the CRA website.

RDTOH has been further segregated by non-eligible and eligible dividend amounts; these amounts will only be available when eligible or non-eligible dividends are paid out respectively.

An eligible individual is entitled to a cumulative lifetime capital gains exemption (LCGE) on net gains realized on the disposition of qualified property. This exemption also applies to reserves from these properties brought into income in a tax year. 

When you make a profit from selling a small business, a farm property or a fishing property, the lifetime capital gains exemption (LCGE) could spare you from paying taxes on all or part of the profit you’ve earned. For many small business owners, it’s a tool to help them save for retirement or invest more in another small business.

If you sell qualifying shares of a Canadian business in 2023, the LCGE is $971,190. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $485,595. 

For example: You sell shares of a small business corporation in 2023 and make a $1,000,000 profit (also called capital gains). Without the LCGE, you would have to pay taxes on half of this amount, i.e., $500,000. However, seeing as the LCGE allows you to subtract $971,190 from your profits in 2023, you only pay taxes on ($1,000,000 - $971,190) x 50% = $14,405 rather than on $500,000. 

You end up reaping major tax savings!

The LCGE has a cumulative lifetime limit, so you can apply for the exemption multiple times, until you reach the cap.

For example: You sell shares of a small business in 2023 and turn a profit of $500,000. You only use $500,000 of the LCGE at that time, but because the LCGE is cumulative, you can apply the remaining $471,190 (i.e., $971,190 minus $500,000) the next time you make a profit.