Generally speaking as a Toronto business advisor, incorporating your business offers numerous advantages. Most importantly you will be able to defer income from personal taxation. For example, in Ontario you can defer 34% in taxes if you are in the top Ontario income tax bracket by earning income through a corporation you own. Of course, the CRA is not always fond of this loophole, but the Canadian government wants small businesses to expand successfully. To this end, tax law is quite generous in which corporations are offered this 34% deferral. As I outline below, it is fairly easy to qualify.
There are a few qualifications:
(a) The corporation must not be a public company that is owned > 50% by Canadians
(b) The corporation cannot be an “incorporated employee,” i.e. a person who provides services to their employer via a corporation rather than directly (more about that in a future blog) or a corporation that derives more than 50% of their income from “passive” income dividends, such as rent, unless the corporation has more than 5 full time employees through the year
Of course, many people are not aware of the second requirement but, as a Toronto business advisor, I can assure you that CRA is. In the past few months, I have seen at least 4 form letters from CRA that, in more complex terms, state, “We think your corporation looks like a passive income corporation and we will tax your corporation at the highest tax rate possible unless you prove otherwise. You have 30 days to provide us with your proof.”
Given the relative simplicity of the law, if your corporation earns the majority of its income from rent or passive sources and the corporation does not have more than 5 full-time employees (they must be on the payroll), the company will have to pay the higher rate of tax. While a significant portion of this tax is refundable, your 34% deferral becomes about a 3% deferral.
If you are in this situation, please contact me to discuss how, as a Toronto business advisor, I can help you navigate the tax laws effectively.
I have seen a fair number of clients not file tax returns for several years. Some of them have been lucky and CRA has not found them or have left them alone (for now). However, in other cases, if you do not file, CRA will make up numbers and say that this is your tax return. And dealing with CRA in Toronto is never enjoyable. What is to stop the CRA from saying you made $1,000,000 a year if you don’t file your tax return?
And if the CRA issues you a “Notice of Assessment” with $1,000,000 as your income and you do nothing, you will get a call from a CRA collection agent asking for the tax on $1,000,000. If you continue to ignore them, they will empty out your bank accounts, place a lien on your home and garnish your wages or your business income until it is paid off.
I wish I was making this up. I had a case where a corporation had GROSS SALES (not profit) of $100,000 per year. The corporation had filed for a couple of years but then the owner got sick and due to customers skipping payments, the owner was forced to cease operations. Since the business had ceased operations, the owner did not file tax returns for the later years. When CRA “filed’ the outstanding returns for the corporation and issued Notice of Assessments, CRA claimed the corporation made $150,000 of TAXABLE INCOME per year. How did they get that number? Who knows. But under Canada’s tax law, if CRA states a number and you don’t challenge it, it becomes a valid number and you have to pay it. You might get it reduced but you are at CRA’s mercy, which is not something I would not want in this situation.
Fortunately, the owner came to me and I was able to put together the corporation’s tax returns and filed a Notice of Objection (a formal letter to CRA saying you do not agree with the Notice of Assessment) with the CRA to ensure CRA would process the real returns. The CRA (eventually) processed the correct returns and the corporation’s $200,000 tax bill disappeared. Because we began dealing with CRA in Toronto immediately and directly, we could ensure the owner was not forced into a financial downward spiral.
This example shows the importance of reviewing all CRA letters (see my previous post on opening the mail) and dealing with it on a timely basis .
Most importantly you should always file your tax returns on time.
If you haven’t filed your old tax returns for you and/or your business, please contact me. I would be happy to help you in dealing with CRA in Toronto and sorting your taxes.
William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area
Always open the mail!
Yes, that does sound silly, but there are always people who are afraid to open letters from the “Tax Man”, i.e. the Canada Revenue Agency (“CRA”). While this is completely understandable – since you rarely get good news from CRA – it is still important to review any letters from them, ASAP! Letters may be inquiring about:
– Information about your tax return;
– Informing you that they will be auditing you;
– Giving you an arbitrary tax bill (“assessment”); or
– Asking for payment.
Not responding in a timely manner can result in you losing money.
If you have received a letter from the CRA (or any other tax authority, like the IRS), please contact me and I will be happy to assist you. As an Oakville chartered accountant, I have dealt with these letters countless times.
William Khalilieh is an Oakville Chartered Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.