By James Lanning
Entrepreneurs often get excited about the prospect of starting a new business. So much so that they usually hop right in, with very little knowledge of what is expected of them. Whether you are a chef opening a restaurant or a stay-at-home parent starting an in-home day care, there are certain dos and don’ts you should know about. This article aims at helping individuals who are experts on what they are selling but may not have the business knowledge to match. These tips will give you the foundational knowledge you need to start your business on the right track.
#1 INCORPORATE OR NOT?
Without going into too much detail, here are a few important distinctions between an incorporated business and a sole proprietorship.
Separation for both tax and liability purposes
A corporation is considered a separate entity; a sole proprietorship is you and your business. If someone takes legal action against your business and you are incorporated, you are protected personally from potential legal exposure; if you are a sole proprietor, you are not.
For tax purposes, you must report all income from your sole proprietorship in the year that you earned it, and you will be taxed on it at your personal tax rate. An incorporated entity allows you more flexibility. Business owners can retain earnings in the business and be taxed at a lower rate (the small business rate in most cases), deferring their personal tax obligation to another time.
More attractive if you are looking to sell
If your plan is to grow your business to someday sell, it is generally easier to do so as an incorporated entity. It will be easier to value the assets or shares of your company as a separate entity from yourself. If you are a sole proprietor, there are no shares to sell, and the assets are owned personally. Furthermore, there could be tax savings for the seller if they are able to meet the criteria for the lifetime capital gains exemption (LCGE). Under the LCGE, a business owner operating as a Canadian Controlled Private Corporation (CCPC) can sell their shares at a gain of up to $913,360 without paying any tax.
If you do choose to incorporate your business, there will be some additional costs involved. Upfront, you will incur fees of approximately $300 to reserve your company name and file your articles of incorporation. You will also incur legal fees to get your articles drafted, and the amount can vary depending on the corporation. Annually, you will need to file a return with your Provincial Registry, which will cost around $100, and then because your company is a separate entity you will need to file a Corporate Tax return (T2) each year, which could vary in cost depending on the size of your organization.
#2 SET UP A SEPARATE BANK ACCOUNT
We always recommend that you set up a separate bank account when starting a business. New business owners will often start making purchases and accepting payments into their personal account; this will make it very difficult to distinguish between personal transactions and business transactions for tax purposes when it is time to prepare and file your taxes. When you use a business bank account for your business transactions, it’s easier for others, such as your bookkeeper or accountant, to find the information they need. A small business account is also the foundation for building business credit so that you can eventually apply for business credit cards, lines of credit, and loans or mortgages.
#3 SHOULD I CHARGE HST AND WHEN?
Understanding if and when you will need to start charging and remitting HST to the CRA is extremely important for business owners. It is common for business owners to start selling goods and services before knowing whether they are required to charge HST or not. They may be required to remit HST having not collected it from their customers, and to pay interest and penalties on the late filing.
First, you need to know whether the product or service you are selling is HST-applicable, HST-exempt, or zero-rated. Most products or services are HST-applicable, and therefore you may need to register for, charge and/or collect HST. However, some products/services are HST-exempt or zero-rated (you can find a more detailed list directly on the CRA website):
most health, medical, and dental services performed by licensed practitioners
legal aid services
many educational services
When a product or service is HST-exempt, it means you are not able to charge HST on its sale, but also are not entitled to claim the input tax credits (ITCs)1 on purchases made to provide these supplies.
basic groceries such as milk, bread, and vegetables
most farm livestock
most fishery products
certain medical devices
feminine hygiene products
When a product is zero-rated, it means that HST does apply, but at a rate of 0 percent. That is, you do not need to charge HST—however, you are allowed to claim ITCs on the purchases made to provide these supplies.
There are a couple of rules that are important when you’re wondering when you should start charging HST and how often you will need to remit to the CRA. The first rule of thumb is that you do not have to register if you are a small supplier— this means the total amount of your revenues is $30,000 or less in any single calendar quarter and in the last four consecutive calendar quarters. You can, however, voluntarily register prior to meeting this threshold. This can be especially attractive to new businesses who are incurring more costs than revenues and would like to take advantage of claiming the ITCs related to these expenses. Something to be aware of: you cannot start charging HST prior to registering with the CRA; on the flip side, once you have registered you now must charge and remit HST. Then to determine how often you are required to remit, the CRA uses revenue to define the following threshold amounts:
less than $1,500,000—annual
between $1,500,000 and $6,000,000—quarterly
more than $6,000,000—monthly
However, businesses earning less than $6M and $1.5M can elect to remit HST on a quarterly or monthly basis as well. Some businesses will choose to do this to line up with their existing business accounting cycles and make for less work at the end of the quarter or year.
Input tax credits, or ITCs, are defined as the HST/GST you pay on an expenditure for your business for the purposes of selling your supply, product, or service. When calculating the amount of HST/GST to remit to the CRA, a business should calculate the amount of HST/GST collected from the sale of its supply less the amount of HST/GST spent on purchases to provide that supply.
James has more than seven years of experience working in positions ranging from financial controller to director of operations. He graduated with a BComm in 2014 and received his CPA designation in 2017 and a Certificate in Project Management in 2018. In 2021, he completed the Oxford Strategic Innovation programme. A perpetual learner, James is keen to help entrepreneurs grow their businesses by providing accurate, timely, and consistent financial information.