How Incorporating Your Business Can Affect Your Taxes

You own a small business and you’re ready to take it the next level. Incorporating your business carries many benefits including easier access to capital, enhancing your business’s credibility and creating an enduring legal business structure.

It also provides protection from personal liability, meaning that you can safely separate your personal assets from the business.

Does this mean you can protect your personal taxes as well?

Read on to learn how you can avoid having your taxes negatively affected by your business’s activities as well as tax benefits from incorporating and how to file your corporate income tax return:

What Does Incorporating a Business Mean?

When you incorporate a business, it means you are turning a sole proprietorship, or general partnership, into it’s own legal business structure. This business structure is set apart from the individuals who founded it.

Incorporation creates a separate legal entity in order to transact business.

Can Incorporating My Business Affect My Personal Taxes?

Because of the limited personal liability that incorporation offers, your personal assets are protected from tax-related issues.

There is an exception if you fail to deposit taxes withheld from wages. For those, you are held personally liable.

Also, if you treat the corporation as an extension of your personal affairs instead of as a separate legal entity, you could be held personally liable for financial issues. For example, you may be considered using your business as an extension of your personal affairs if you fail to follow routine corporate formalities.

As the owner, and as an individual, you are otherwise expected only to pay personal taxes on your income like any regular employee.

The corporation pays taxes on residual income after salaries, bonuses, overhead and other expenses are paid.

Can I Save Taxes By Incorporating?

In general, corporate tax rates are lower than personal tax rates – so there is opportunity to save taxes by incorporating.

However, in order to benefit from lower tax rates, the company would have to generate a substantial profit.

You can take advantage of lower tax rates if you earn more than you need to live on. Should your profit exceed what you require as a living wage, you can leave the difference in the corporation and pay a reduced income tax rate.

Otherwise, you can take advantage of income splitting in order to save taxes with your corporation. This involves splitting the business income with family members.

Income splitting can create tax advantages more beneficial than reduced tax rates.

Liu & Associates can prepare and file your corporate income tax return for you as well as take advantage of any and all tax benefits. Contact us to find out more information.

How Do I File Taxes for Incorporation?

Corporations are expected to file a T2 corporate tax return every year within six months of the end of its fiscal year. A fiscal year can be the same as the calendar year or it can begin in any months and end twelve months later.

You can file a corporate income tax return electronically with tax preparation software certified by the CRA.

The T2 corporate tax return is more complex than a personal income tax form. It is recommended that you have your corporate tax return prepared by a professional tax accountant.

If your corporation owes taxes after filing a return, the balance can be paid through the CRA online services, from the business’s bank account or by cheque.

Put Your Corporation In Good Hands

Navigating the world of taxes once you incorporate your business can be tricky and complicated.

Avoid making costly mistakes by contacting our expert accountants at Liu & Associates. We can help you properly prepare and file your corporate taxes so that you can experience all of the benefits of incorporating your company.

Does Declaring Corporate Bankruptcy Affect Me or My Credit?

Bankruptcy may seem like a golden ticket when you are looking at clearing debts from your creditors – but there are many things to think about before you file for bankruptcy, especially if you are doing so for your corporation.

One such concern is whether or not declaring corporate bankruptcy will affect your personal credit.

When it comes to owning a corporation, as opposed to a sole-proprietorship or partnership, you are not legally responsible for business debts. However, there are exceptions for which you can be personally liable. Before explaining these exceptions, it’s best to understand the difference between corporate bankruptcy and personal bankruptcy.

Corporate Bankruptcy versus Personal Bankruptcy

Because both individuals and corporations can own assets, they are both able to file for bankruptcy under the Bankruptcy and Insolvency Act.

The process is fairly similar, which a few key differences:

When declaring personal bankruptcy, all assets and liabilities are considered personal.
When declaring corporate bankruptcy, an incorporated entity is considered a legal “person” according to the Bankruptcy and Insolvency Act. This means that while some debts may be eliminated under bankruptcy, there are those exceptions that you may be held personally liable for.

The process of declaring bankruptcy is similar as well. The individual or corporate business owner must meet with a Licensed Insolvency Trustee (LIT) to file for bankruptcy. Once the bankruptcy is filed, creditors are notified and not permitted to contact you regarding the debt.

From the date of filing, you are eligible to be discharged from the bankruptcy after 9 months. However, the bankruptcy will remain on your or your business’s credit history for at least 6 years.

Before making any decisions about bankruptcy, talk to a trusted advisor at Liu & Associates to consider alternative solutions to your financial problems.

How Corporate Bankruptcy Can Affect Your Personal Credit

As mentioned above, there are special circumstances in which filing for corporate bankruptcy could affect your personal credit. These circumstances include making personal guarantees on loans or credit and the company’s tax liabilities.

Personal Guarantees

It’s possible that when you apply for a loan or credit, the lender or creditor will require the corporate business owner to sign a personal guarantee for the credit. This is an agreement that you, as an individual, will take full responsibility for the payments.

Should you file for corporate bankruptcy, this debt then becomes your financial responsibility. If the debt is unpaid, it affects your personal credit.

Business Taxes

Unpaid business taxes are not typically cleared through corporate bankruptcy. This includes any taxes withheld from employee salaries or sales tax (also known as trust fund taxes). You are personally responsible if you collect these taxes but fail to forward them to the taxing authority. This unpaid debt will directly affect your personal credit.

Bankruptcy As a Last Resort

Before you file for corporate bankruptcy, it is recommended that you seek professional assistance to discuss all of your options.

Even if you have no debts that could be held against your personal credit, there are considerations that should be made before declaring corporate bankruptcy:

The business will be finished.
Your employees will lose their jobs.

If your corporation has run into financial difficulties, there may be an alternative to your situation. Our expert accountants at Liu & Associates can review your corporate finances to determine if there is a better path for you, your business and your employees.

What Does It Mean To Incorporate a Business?

If you run a small business but want to develop your company into a serious enterprise, you should consider the process of incorporation.

While incorporation involves a whole new aspect of accounting and tax preparation, as well as an application process, there are innumerable benefits to incorporating a small business.

What is Incorporation?

Incorporation, often abbreviated as “inc.” in the United States and Canada, is the legal process of forming a legal entity, or corporation, which is then recognized by law. This process then separates a company’s assets and income from those of the owners and investors.

How To Incorporate a Business

To incorporate your business, use the following steps:

Choose a name for your corporation

Be sure to choose something distinctive and not misleading. You can use the NUANS® Search System to compare your proposed corporate name with databases of existing corporate names. This comparison determines any similarities that may exist between your chosen name and existing names.

Complete the articles of incorporation

The articles of incorporation establish the structure of the corporation. This form needs to be signed by an incorporator. Incorporators are typically the owners of the business but can also be members of the law firm handling the incorporation process.

Establish an initial office address

This is the address in which all of the corporation’s records and documents will be located. The board of directors should also be established and their addresses provided in application as well.

File the proper forms

The proper forms must be filed and the necessary fee paid. There are two forms which are necessary to incorporate: Form 1 (Articles of Incorporation) and Form 2 (Initial Registered Office Address and First Board of Directors). Other forms may be necessary depending on the situation – you can find them here.

Wait for the application to be processed

If the application is incomplete, it will be returned with an explanation as to why it was invalid. A completed form may also be returned if there is pertinent information missing.

Otherwise, a completed and accepted application will be processed and the applicant will be notified of its success.

The Benefits of Incorporating a Business

While incorporation may seem like a lengthy and complicated process, there are significant benefits to incorporating your business.

Here are a few advantages to incorporating your business:

Protect the Owners and Investors Assets from Company Liabilities

Corporation owners exists separately as individuals from the company entity. Any debts or liabilities held against the company do not personally affect the owners and investors.

This means that personal assets, such as houses and cars, cannot be seized in relation to the company’s debts and responsibilities.

That being said, a corporation can own property which is not protected against liabilities.

Allows Company to Raise Capital Through Stock

When you incorporate a business, you have more opportunities to raise money in order to grow and develop your company. Corporations can incur debt but they can also raise money by selling shares.

This is known as “equity financing” and is highly beneficial to companies since it does not have to be repaid and incurs no interest.

The only caveat is that issuing shares reduces your percentage of ownership in the company.

Corporations Have Unlimited Life Spans

As owners and shareholders pass away or move on, their shares are transferred to their heirs or sold. This means that as those in charge of the business are no longer involved, the corporation itself passes on through inheritance or sale.

Incorporating Makes a Business Credible

Incorporation provides credibility to a business by projecting a serious nature to potential investors, lenders, suppliers, customers and employees. It distinguishes a company as one that is long-lasting and committed to continuing into the future.

Take Your Business to the Next Level

Our professional accountants at Liu & Associates can help you navigate the process of reorganizing your accounts and taxes if you decide to incorporate your small business.

Feel free to contact us today for more information!

Common Tax Mistakes Small Businesses Make

Small businesses are taking the world by storm as more and more people opt to work for themselves and create their own legacy. With growing businesses come growing pains and many small business owners are prone to making many mistakes – especially when it comes to taxes.

If you are a small business owner, or are thinking about starting your own business, avoid the hassle of tax-time headaches by avoiding these common mistakes:

1 Not Keeping Receipts

If the CRA sees any amounts on your claim that seem a bit too high or suspicious, they are entitled to perform an audit on your return. This would require that you provide receipts as proof of expenses so the CRA can compare the totals to those on your return.

Some businesses make the mistake of relying on their credit card statement as a record of expenses for their company. Unfortunately, the CRA does not accept credit card statements as evidence of expenses.

To avoid any potential issues with receipts and expenses, keep all receipts related to your business. Maintain an organized system by writing exactly what the receipt was for on the back.

2 Claiming Personal Expenses

When certain aspects of your personal life are used to run your business, it is important that you make a clear distinction of what percentage is business and what percentage is personal. When you fail to divide the usage, filing your taxes will become a confusing mess that will need to be sorted out.

For instance, you may use your personal vehicle for business purposes. By tracking the amount of time you use your vehicle for business, and comparing it the time you use it for personal reasons, you can generate a percentage that you can then apply to vehicle-related expenses.

3 Inaccurate Payroll Records

Many small business owners take it upon themselves to manage payroll to their employees. However, a disorganized payroll system not only creates a nightmare when preparing to file taxes but can also result in some hefty penalties if not done correctly.

Speak to a professional accountant about how you can best organize your payroll system and properly classify your employees to avoid tax related issues.

4 Forgetting to Charge HST

When your small business makes less than a $30 000 annual income, a registered HST number is not necessary. Some businesses, however, find themselves experiencing an increase in income and surpass the $30 000 mark before realizing they have yet to apply for an HST number.

It is recommended that all small businesses, despite their annual income, register for an HST number right away. This will ensure that you are prepared should your annual income surpass $30 000. Otherwise, you may be penalized for not charging taxes if your annual income is greater than that amount.

5 Failing to Report Cash or Trade Payments

Some small business owners believe that if a transaction is not recorded on paper then there is no need to claim the payment as income. This is very illegal and all cash and trade exchanged for product or work must be reported.

If not, the CRA may impose severe penalties that include charging interest, court fines and possibly jail time. It is best for all small business owners to report all income and keep copies of receipts made out to customers and clients.

6 Being Disorganized

Overall, the biggest mistake small business owners make is being disorganized. Tax time is the worst time to play catch up on your record keeping.

An experienced accountant can help you keep all your records organized as well as aid you in preparing your taxes.

Contact Liu and Associates today with any questions you may have about organizing your small business and preparing for your tax return.

Consequences Of Not Filing Corporate Tax In Alberta

By not filing your corporate tax return on time (or at all), you’re opening yourself up a number of different penalties from the Canadian Revenue Agency (CRA). Join Liu & Associates as we highlight a few of the penalties below. Keep in mind this list below is by no means exhaustive. For a complete list of corporate tax penalties, visit canada.ca.

Failure to File

Corporate tax filing deadlines vary depending on your corporation’s fiscal year end, as well as what type of corporation it is. A corporation has to file their return within six months after their taxation year end, and payment is due either two or three months after taxation year end.

Generally speaking, the penalty for late filing is 5% of the unpaid tax that is due on the filing deadline, plus 1% of the unpaid tax for each month that the return is late, for up to 12 months.

A larger penalty will be charged if the CRA issued a demand to file the return and assessed a failure to file penalty in any of the previous three tax years. This penalty is 10% of the unpaid tax when the return was due, plus 2% of the unpaid tax for each month that the return is late, for up to 20 months.

Instalment Penalty

When the installment interest is more than $1,000, the CRA may charge an installment penalty. The penalty amount is calculated by subtracting the greater of $1,000 and 25% of the installment interest calculated if no installment has been made for the year. The difference is then divided in half to get the final penalty amount.

Large Corporations

A corporation is considered to be a “large corporation” is their total taxable capital employed in Canada at the end of the tax year by it and its related corporations is over $10 million. You can identify yourself as a large corporation on your T2 form.

If a large corporation fails to file their return, a penalty can be charged for each month that the returns are late, for up to 40 months. The penalty is calculated by adding up 0.0005% of the corporation’s taxable capital employed in Canada at the end of the year and 0.25% of the Part VI tax payable by the corporation (before deductions).

False Statement or Omissions

The CRA can charge a penalty if a corporation, either knowingly or due to gross negligence, makes a false statement or omission on their corporate tax return. The penalty for a false statement or omission is the greater of either $100 or 50% of the amount of understated tax.

The Exceptions

It’s good to note that the CRA will sometimes consider waiving penalties or interest if the reason for a late filing or not paying is beyond the taxpayer’s control.

Liu & Associates Can Help

If you need help with your corporate tax return, give the experts at Liu & Associates a call. We will work with you and your company to make sure your corporate tax matters are as smooth and cost-efficient as possible.

SR&ED: 5 Things To Know

Scientific Research and Experimental Development is a mouthful, but shortened to SR&ED or “shred” it may be familiar to business owners. A federal program designed to incentivize industry with tax credits, SR&ED and its benefits are enforced by the Canada Revenue Service (CRA). Most of the time, claims and reviews are a simple process– but the following are five brief tips from the experts here at Liu & Associates.

#5 Who can apply? Individuals, trusts and foreign-owned corporations are all eligible for SR&ED and its incentives. Canadian-owned private corporations can claim these benefits at an even higher rate thanks to lawmakers’ efforts to encourage local innovation.

#4 Prescribed proxy amounts (PPA) are used in case you are not prepared to claim all SR&ED overhead and expenses (traditional method). Using the proxy method, your PPA is calculated against the salaries of all staff involved with SR&ED.

#3 Supporting documentation may be needed if your business’ SR&ED claim is flagged for review by the CRA. Always keep any documentation that could support your claim, including but not limited to accounting records, prototypes, financial records and even photographs.

#2 Investment tax credit (ITC) is what is generated by a successful SR&ED claim– it can reduce your business’ taxable income. Select cases may even be eligible for partial refunds paid for by ITC.

#1 Tax deduction is tied directly to what your company spends on SR&ED. Third party payments; overhead and material budgets; salary, wages and contracting costs… All of these could result in a tax credit or an ITC refund.

These tips are only a summary of the details surrounding Scientific Research and Experimental Development. As a federal tax credit program, there are intricacies that should only be handled by your business’ chief financial officer or a trusted accountant. If you have any questions or concerns about SR&ED, contact or visit us today at Liu & Associates!

Year-End Tax Planning Strategies for Businesses

If you operate a small business or the finances of a larger organization, you may find tax season very frustrating. Each document can reveal missed financial opportunities or unnecessary costs that could make a crucial difference in these difficult economic times. Don’t get stuck in the same spot next year, consult Liu & Associates’ list below for some helpful tax planning tips to mitigate higher taxes for businesses.

EMBRACE TECHNOLOGY

Avoiding tax accounting software and computers is unnecessarily costs you or your business capital that would be better spent elsewhere. From labour costs to fees for late or inaccurate returns, there are incredible savings to be gained by employing affordable, professional computer programs. Not only is most software endorsed by financial experts, it can also catch trends and opportunities that human error might overlook.

USE A FAIL SAFE

Don’t leave your business’ tax return to the last minute or even in the hands of just one individual. Spreading out financial preparation over the year and having another set of eyes can help catch mistakes and potential areas of improvement. Your business may suffer if you fail to prepare for the worst– if you do, you can expect the best!

HIT THE BOOKS

You and your employees should be well acquainted with eligible tax savings and deductions. Being aware of these options early on can help avoid higher taxes than you need to pay. Don’t overlook the value of minor costs added up over time– travel, gas, accommodation, meals, entertainment and even office supplies can often be deducted by businesses and their employees.

FILING SYSTEMS ARE YOUR FRIEND

We’ve all seen the caricature of a small to medium business owner with an overstuffed shoe box of bills, receipts and invoices (not to mention the exasperated accountant)! There is a reason society makes of this situation– anyone with interest in furthering their business should be well on top of its finances. If you are naturally disorganized or easily overwhelmed, there is no better money spent than that which builds an error-free, easy-to-use filing system.

KEEP IT PROFESSIONAL

Never mix your business and personal accounts! This can create a quagmire of documents for you, your bookkeeper or your financial advisor. Clear business records will ensure you are taking advantage of every opportunity.

This list only covers a portion of the financial responsibilities of a business, but if you have any questions: Liu & Associates can help! Our staff is standing by to offer consultation and guidance to keep your business in the black all year round.