Navigating uncharted territory: Tax obligations to know when launching your start-up

Launching a startup is no easy feat, and keeping up with Canadian tax compliance can seem overwhelming. It’s vital to work with an experienced advisor to understand which taxes you need to pay, when taxes are due and what your filing obligations are.

Zeifmans is a proud partner of Schulich School of Business’s Startups Program, which offers advice and guidance to budding entrepreneurs.

For many of these entrepreneurs, tax compliance can seem complicated, which is why a solid strategy is essential for long-term growth. We’ve compiled a fact sheet on what startups need to know about their Canadian tax obligations.

Structuring your company – important tax implications

Your tax obligations depend on how you structure your startup. Options include:

• Sole Proprietorship or Partnership. While this is a simple way to start a company, with little paperwork and startup costs, all income or losses will be reported on the founder(s)’ personal income tax returns. This means that, if a founder’s business is profitable, your tax rate will be higher than a corporation’s rate.
• Choosing to incorporate will allow companies to make use of lower corporate tax rates and will separate the business from the founder, as a corporation is its own legal entity.

Incorporating opens startups up to a variety of tax credits and incentives, including the Lifetime  Capital Gains Exemption (LCGE), which is helpful when you’re ready to sell. This tax credit reduces the amount of taxes owed on the sale of qualifying shares of a Canadian controlled private corporation. The 2023 LCGE limit stands at $971,190.

Sole proprietorships and partnerships are not eligible for the LCGE.

How to register for a CRA business number

Whether or not you choose to incorporate, a new startup will need to register for a business number with the Canadian Revenue Agency (CRA). Think of this like a company’s social insurance number. To register, simply call or email the CRA.

Prepare the following information:

• Who owns the business?
• What are your company’s major activities?
• Your GST/HST info
• Your payroll info
• Any import or export activities
• If you incorporated, you’ll need your incorporation number

Startups will be issued a number in this format: “00000 0000”, which will never change. For some, the number will be accompanied by:

• RC0000 (for Corporate taxes),
• RT0000 (for GST/ HST)
• RP0000 (for Payroll).

What to know when it comes to payroll

When hiring employees, payroll is an important consideration. Canadian law includes payroll compliance legislation that protects an employee’s right to payment and introduces regulations employers must follow.

According to Canadian payroll law, employees must be compensated at a regular interval and each paycheck needs to show all payments, including overtime and holiday pay.

All businesses having salaried employees must pay payroll taxes to the CRA. To do this, follow these steps:

1. Register for a Payroll Account.
2. Calculate the required payroll deductions per employee. These include federal/provincial income tax, Canada Pension Plan and Employment Insurance contributions. Ensure you are deducting and remitting taxes for each employee’s gross pay.
3. Report all payroll deductions and remittance to the CRA regularly (typically on a monthly basis but can be more frequent) Employers must also submit payroll-related documents to the CRA, including T4 slips and summaries on a calendar year basis .
4. As an employer, you’re also responsible for contributing to an employee’s CPP and EI . This is separate from employee deductions.
5. Work with a tax and business advisor, like Zeifmans’ team of experienced accountants, to ensure you stay compliant with all remittance deadlines and reporting requirements.

Ensure all records are kept up to date

A common mistake start-ups make is not keeping their books organized and up to date from the beginning of their journey. It’s important to have a trusted accountant and bookkeeper who can help you ensure you’re not missing any deductions or key information.

Not only does this help with internal record keeping, provincial and federal regulations require founders to keep information about taxes, compensation, employer contributions, and insurance premiums organized and recent. All records should be easily verifiable if needed.

Understanding tax obligations when doing business with the U.S.

If you’re a startup that does business across the border, you may have U.S. tax reporting and compliance obligations. This can vary based upon a start-up’s economic nexus, which refers to a number of factors that determines the extent of a company’s presence in a jurisdiction, like Canada or the U.S., to trigger tax obligations. A company may have a significant presence in the U.S., through physical locations or, depending on the state, through online e-commerce stores, or if a company’s employees or agents often travel to the U.S.

Cross border taxation issues can become complicated, to avoid potential tax traps, it’s vital to consult with a cross-border accounting expert. Zeifmans has decades of experience helping entrepreneurs expand across North America.

What to know about filing your corporate tax return

While personal taxes have a year-end of Dec. 31, corporations can choose their year-end based on factors like tax planning, tax deferral, operational needs and your business cycle. If December is particularly busy for your company, for example, then it wouldn’t make sense to choose it as your fiscal year end. Instead, you might move that date into the following January or February.

Once your corporation chooses its fiscal period, your first tax return will be due six months after that date. It’s vital to have a corporate planning tax strategy in place that can minimize your tax liability while increasing profits. Your tax advisor will help you navigate this process. Strategies include leveraging tax deductions, using tax credits to lower your burden or making use of tax-efficient financial planning.

Understanding GST/HST returns

The frequency of your GST/HST returns depends on your business’s revenue. As your business grows, you’ll be able to contact the CRA to change your filing period. When filing, your return will show your gross revenues, any GST/HST you collected, any GST/HST you paid, and any income tax credits used.

Filing frequency based on revenue:

• Sales over $6M: File monthly
• Sales between $1.5M-$6M: File quarterly
• Sales under $1.5M: File annually. Note: If your net remittance is over $3,000, you’ll be expected to pay quarterly installments

Leveraging tax credits and incentives

Navigating the many tax credits available in Canada can be complicated but important for your budding business. Zeifmans’ experienced advisors can help startups understand which incentives they’re eligible for and guide them through the application process many startups are surprised to learn they may qualify for the Scientific Research and Experimental Development Tax Incentive Program (SR&ED), a tax credit for Canadian-controlled private corporations undergoing research and development efforts.

Another potentially useful credit is the Industrial Research Assistance Program (IRAP) – Financial Assistance. This is a non-repayable financial contribution to businesses for developing, adopting or adapting innovative technologies.

For a list of federal and provincial incentives and tax credits, check out our recent cheat sheet.

Preparing startups for long-term growth

As a partner of Schulich’s Startups Program, Zeifmans advises founders in a number of industries as they prepare to launch and grow. To learn more about how we support new companies, visit our startups page or contact us to start the conversation.