Open a Business Bank Account and Credit Card
Once you have incorporated, you should set up a business bank and credit card as soon as possible. Once you do, it is important to be disciplined with your business banking. Ideally, you should use your business bank and credit card accounts for most transactions. Using personal bank accounts, beyond a handful of transactions, can lead to issues with CRA. If you do use personal bank accounts for a few transactions, create an expense report within your accounting system and ensure that you maintain the documentation. It is also a good idea to sign up for the business online tax filing service that most banks offer that allows you to pay your payroll tax, sales taxes (GST/HST and QST) and corporate taxes easily.
Sign Up For Government Business Accounts
Ensuring that you register for CRA’s my business account (and if applicable RQ’s my account for business or Clic Sequr) allows you insight into your tax information, deadlines, obligations and a way to file and pay your taxes. This is essential, now more than ever, as more and more services are only available online. You can also use these accounts to register for payroll or cancel it, see a statement of account of how much you owe or have paid, add your accountant to your file so that they can have seamless access and a variety of other services.
Set up An Accounting System
For many small corporations, not much needs to be done, from a tax perspective. at the beginning in terms of accounting, sales tax, or corporate tax, as deadlines are often many months away. However, it is a good idea to set up an accounting system as soon as possible and to find an accountant. This will ensure that you are not scrambling at the last minute to meet deadlines and so avoid errors and/or penalties. Establishing a relationship with an accountant might take some time and they often take time to respond to new clients.
Register for Payroll
If you register for payroll, filings usually need to be submitted monthly, at least in the beginning. It is important that you understand your payroll filing deadlines and remit deductions, on employees’ salaries, to CRA (and Revenue Quebec, if appliable) by the due date. If not, interest and penalties for late payroll submissions are steep. There are a variety of payroll services that you can use that will streamline the process for you and some will do all of your payroll filings, including year end filings such as T4s, for a reasonable fee.
Determine Your Owner/Manager Compensation
Determine how you are going to pay yourself, either via salary or dividends. If you decide that you will borrow money from the corporation in the beginning, ensure that you have a plan to either repay it within one year or declare it as a dividend or salary. If not, CRA will assess it as income that will result in unnecessary taxes (and of course interest and penalties).
Maintain a Copy of All Your Invoices and Expenses
It is very important to keep all your source documents including receipts, bills, expenses, and invoices. Ideally, you would set up a paperless office, scan your documents into an accounting folder (using whatever organization system that works for you such as alphabetical or by category. ) so that you can access the documents easily. Alternatively, a physical filing system is also fine. Most accounting software will also allow you to attach the source documents to the transaction record so it is all in one place.
Have Sufficient Cash Flow for Tax Obligations
Ensure that you maintain enough funds in the corporation to pay your taxes. Once you register for GST/HST, remember that you are simply an agent of CRA – you collect the sales taxes on their behalf (by adding them to your invoices) and pay them by a specific due date. These funds should not be used as cash flow in the business unless you are sure you will be able to repay them. It can be useful to open a separate savings account, where you transfer estimated sales tax payable; this also allows you to collect some interest. Similarly, you should ensure that you can cover the deductions at source that are deducted from employees (or your own) salaries as well as corporate income taxes that are payable on the profits of the corporation.
Be Aware of Tax Deadlines
Be aware of tax deadlines, even if you have an accountant, and ensure that you respond to your accountants request for information as promptly as possible so that they have sufficient time to prepare and submit your tax filings. Corporation deadlines are often based on the year end of the company which can be any date in a year. As such, these are different from personal tax and unincorporated business tax deadlines.
Understand Basic Accounting and Tax Concepts
Most accounting and tax concepts relating to small business corporations are fairly straightforward. Since you know your business better than anyone, it is beneficial to understand these concepts so that you can better contribute to the decision-making process. If you have questions, your accountant should be able to provide some insight. There are also a number of small business videos and blogs that can help you with this process.
Be Reasonable with Your Expenses
When claiming expenses, ensure that they are reasonable and relate to the business. There are a number of “soft” expenses such as travel, vehicle expenses, meals etc. that should be accompanied by detailed documentation (such as a receipt indicating the business purpose of the transaction). Large amounts of expenses can raise red flags for CRA that can then lead to ongoing audits (and are deeply unpleasant).
Changing Your Sole Proprietorship to a Corporation
If you have decided to take the plunge and incorporate after having a registered (unincorporated) business, it is important to note that a corporation is a completely separate legal entity. Consequently, you must follow the steps for a new corporation that include getting new business, payroll, and GST/HST numbers. Additionally, you should set up a new accounting file (often business owners will make the mistake of using their existing accounting file which can result in confusion. duplication and erroneous balances). You should also consider a Section 85 rollover. See my article for more on what steps to take when switching from a sole proprietorship to a corporation,
Final Comment
Although a corporation requires more administration that a sole proprietorship, it is still fairly straightforward. The goal (which can really be applied to any situation) is to be aware of your obligations , be proactive and exercise sound judgement.
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