Continuing on with the theme of my previous two columns about the life of a corporation, this next installment will address some of the reporting requirements of the corporation.
As the corporation operates and develops a cash flow, it needs to record the revenues and expenditures so that it can pay taxes and the business can be managed.
One of the first things you need to consider is the application of the GST/HST. If you were previously registered in your sole proprietorship for GST/HST, you don’t immediately need to register again until you reach that magic $30,000 sales threshold. The only reason why you may want to register early is to take advantage of the tax credits before your revenues actually start to take off.
The provincial government has created a website called www.pstinbc.ca and announced that B.C. will be returning to the PST on April 1, 2013, at which time going after the tax credits will not be as attractive.
The next thing to consider is the impact of the Companies’ Act. This act requires that each company have a yearly audit unless the shareholders vote that an audit is not required. There are requirements for a company to have an annual meeting of shareholders and directors. Combined with that is the requirement to continue to be registered with the B.C. Registrar of Companies, meaning that you will need to pay a fee every year to keep your company active.
If you need employees, you will need to set up your company for payroll and withhold the monthly payroll taxes from your employees.
Along with that is the requirement to pay the employer’s portion of the EI and CPP.
There are some caveats with payroll that you need to be aware of such as the minimum wage, overtime rules, statutory holidays and vacation pay, new CPP rules, TD1, timesheets.
Most of this information is available thru Employment Standards of B.C. or the CRA website.
You will also need to register with Worksafe BC.
If you, as the owner, need to take funds out of the company, you can remove tax free any funds up to your investment in the company (your shareholder’s loan). There are some cautions in doing this that depend on your future plans for the company, such as applying for a business loan or selling the company.
If you overspend there is another tax issue whereby you need to repay what you owe to the company in the next period or risk having the entire amount transferred to your personal income and be required to pay taxes on that amount.
If you are removing funds on a regular basis (monthly, for example) you will be required to set yourself up in payroll and remit payroll taxes.
If you only require a lump sum, once or twice a year, you can have the corporation pay the lower tax rates and issue yourself a dividend based on the restrictions of your articles of incorporation.
There is also the option to issue yourself a bonus which will not need to be paid for 180 days after your year end with the taxes being due the following month.
You will be required to keep your corporate records for a period of six years plus the current year and the Canada Revenue Agency has an excellent booklet called ‘Keeping Records’ that explains the kinds of records that you need to keep.
Finally you need to file a T2 corporate income tax return. The tax return itself is eight pages, compared with the four-page personal return and has at least twice as many different schedules as a personal return.
If your company does not qualify for the small business deduction (like an investment company), then you need to pay and file your return within two months of your year end.
Most corporations that have active business income and are Canadian controlled private corporations will qualify for the small business deduction in which case you need to pay and file your taxes within three months of your year end, but if you have a loss, refund or no taxes payable, you can file your return within six months of your year end.
Currently the tax rates for corporations that qualify are 10% federally and 2.5% provincially for a combined rate of 12.5% (with the rates reducing every year).
Compare that with the lowest bracket of personal taxes at 15% federally and 5.05% provincially for a combined rate of 20.05% you can see that it is advantageous to incorporate, let the corporation pay the tax and take dividends out of the corporation provided that you have retained earnings and your income stays in the lowest tax bracket.
