Introduction: Canada Focuses On Economic Immigrants
Immigrants account for approximately a third of all business owners in Canada. This may not be a surprising fact since the most recent Canadian census noted that almost 1 in 4 people in Canada are or have been a landed immigrant or permanent resident in Canada. The thriving scene of immigrant-owned businesses in Canada is largely attributed to the focus on attracting skilled economic immigrants.
Many newcomers, after establishing a successful business operation in Canada, suddenly come face to face with the Canada Revenue Agency. There are no government program or training courses for business owner’s to learn about their tax obligations.
Common issues that trigger a CRA income tax audit include failure to file business taxes correctly and failure to remit or to collect GST/HST. For business immigrants who have considerable foreign businesses and assets, their tax filing can be remarkably complicated and prolonged, including a need to report all offshore income and assets to CRA.
This article is part three of the A Canadian Tax Lawyer’s Guide for New Immigrants in Canada series, which discusses specific issues that business immigrants may encounter when interacting with the Canadian taxation system.
Business Entities In Canada
There are three primary types of business entities in Canada: Sole Proprietorship, Partnership, and Corporation. For different types of businesses, tax filing seasons can look very different. Sole Proprietorships and Partnerships do not have separate legal existence apart from the business owner. In other words, the business profits received via a sole proprietorship or partnership will be added directly to the business owners’ personal income. Corporations have a separate legal existence and file taxes as a taxpayer independent of its owners and operators and can enjoy beneficial tax rates when reporting business income. However, incorporating a business also means that business will be required to prepare annual financial statements and tax returns and maintain corporate records.
Filing Canadian Tax Returns For Your Business
Businesses that provide goods and services in Canada are generally required to register for and charge GST/HST, except for small suppliers. Under CRA’s definition, small suppliers are businesses with revenues that were “equal or less than $30,000 in a single calendar quarter and over the last four consecutive calendar quarters,” excluding consideration attributable to “the sale of goodwill of a business, supplies of financial services, and supplies by way of sale of capital property.” In other words, with certain exceptions, a business generally ceases to be a small supplier once the business revenue exceeds $30,000 within any 12-month period. GST/HST registrants are required to file GST/HST returns on a monthly, quarterly, or annual basis. Filing deadlines of GST/HST returns will be different depending on the GST/HST filing frequency. The GST/HST filing frequency is determined the total amount of annual business revenue.
If you are a sole proprietor, meaning that your business is unincorporated and owned by only one individual, you assume all the risks, liabilities, and responsibilities of the business. A sole proprietor pays business income taxes by reporting business income or losses on a T1 income tax and benefit return. Depending on the type of businesses, you are also required to include financial statements or business statements using one of the CRA forms.
In Canada, a partnership is an association/relationship between two or more individuals, corporations, or partnerships, that join together to carry on a business for profit. Partners are bound by the actions of each other, as long as their actions are within the usual scope of business operations. Similar to sole proprietorship, each partner is responsible for reporting their share of the business profits in their tax returns and the partnership/business does not pay income tax on its own. In addition to financial statements or business statements using one of the CRA forms, a partnership that carries on business in Canada may also be required to file Form T5013, Statement of Partnership Income, for each of the fiscal periods of the partnership.
In contrast to sole proprietorship and partnership, corporations file taxes as a separate legal entity and can enjoy preferential tax rates. For Canadian-controlled private corporations claiming the small business deduction, for example, the net tax rate is currently at 9%. For general corporations, the effective corporate tax rate in 2023 is 15%. However, corporate tax filing can also be much more complicated than filing personal income taxes. For example, a Canadian corporation is required to file a corporation income tax (T2) return every tax year. If you intend to incorporate your business, please make sure that you contact an experienced Canadian tax lawyer to understand the corporation’s tax obligation.
Goods and Services Tax/Harmonized Sales Tax And Input Tax Credit
Goods and services tax/harmonized sales tax is commonly called GST/HST in Canada. When charging and collecting GST/HST, the rate depends on the place of supply. The current rates are:
- 5% in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon;
- 13% in Ontario; and
- 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.
Regardless of the type of business entities, a business may be required to register for and collect GST/HST if it provides taxable supplies in Canada. One exception is permitted under the small supplier rule. If the total value of taxable supplies made by the business or total taxable business revenue does not exceed $30,000 within previous four calendar quarters, then the business is a small supplier for that calendar year and is not required to register for and collect GST/HST. Otherwise, failure to comply with GST/HST rules can result in significant taxes, penalties, and interests owed to the CRA.
If a business wants to claim Input Tax Credit (“ITC”) using the GST/HST paid to deduct the GST/HST collected, then it must register for GST/HST and file a GST/HST return as required. ITCs can only be claimed to the extent that purchases and expenses are for consumption, use, or supply in your business activities. An ITC claim can be audited by the CRA via supporting documentations, such as invoices, receipts, and bank statements. A denied or partially denied ITC claim, in the worst case scenario, can result in a Gross Negligence Penalty. For more information, you can read our article on GST/HST Gross Negligence Penalties, which explains the nature of the penalty and its impact in detail.
Pro Tax Tips – Remember Different Deadlines For Taxes
The Canada Revenue Agency is the government branch that is responsible for taxation and sets different deadlines for a variety of tax returns. Although the list of deadlines is updated every year, the deadline dates usually remain the same. For individuals, personal income tax returns and payment of taxes were due on May 1, 2023, since April 30 was a Sunday. For 2024, the deadline for personal income tax will likely be on April 30. Filing deadline for self-employed persons is usually extended to June 15 or the first business day after June 15 of each year. Deadlines for corporations depend on the business’ year-end while partnership information return deadlines were due either March 31, 2023, or the day that is five months after the fiscal period the partnership ended. Whether you are a business owner, it is always important to remember the deadline for filing different and paying your taxes as late filing can come with penalties and interests. If you are unsure about what deadlines should you pay attention to or what tax filing obligations you may have as a business owner, please feel free to contact our experienced Canadian tax lawyers for tax planning advice.
Frequently Asked Questions
Do I Need To Report My Foreign Business Income In My Canadian Taxes?
Whether a taxpayer needs to report his or her foreign income in Canada depends on the taxpayer’s tax residence. A Canadian tax resident is required to report worldwide income, which include income earned outside Canada and also to declare offshore assets on form T 1135. A non-resident, in contrast, is only required to report his or her Canadian income. If you have issues determining your tax residence or if you have questions regarding your tax filing obligations, please contact our experienced tax lawyers in Toronto for legal advice.
Will My Taxes Affect My Immigration Status?
Generally speaking, taxes are not directly related to immigration. However, there can be circumstances where CRA actions can potentially impact your immigration status. For example, under section 380 of the Canadian Criminal Code, tax fraud is a criminal offence. An immigrant who is charged with tax fraud, as a result, may be required to report the charges to the Immigration, Refugee and Citizenship Canada (IRCC). A conviction will likely lead to criminal inadmissibility depending on your immigration status. If you are aware of any CRA actions against you, please contact our experienced Canadian tax lawyers for legal advice as soon as possible.
Another example is applicable for those who are applying to become a Canadian citizen. The Canadian Citizenship Act specifically states in section 5(1)(c) that a person can only be granted Canadian citizenship if he or she has filed “a return of income in respect of three taxation years that are fully or partially within the five years immediately before the date of his or her application” as required under the Income Tax Act.
“This article provides information of a general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian tax lawyer.”