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David Rotfleisch on the Canadian Taxation System for Business Immigrants

posted 6 months ago

Introduction: Economic Immigrants are a Priority in Canada 

According to the most recent Canadian census, over one in four persons in the nation are either permanent residents or landed immigrants of Canada. This means that business immigrants account for almost one-third of all business owners in Canada. The country’s concerted attempts to draw in skilled economic immigrants are largely responsible for the flourishing community of immigrant-owned organizations in Canada.

It is a fact that many immigrants who have built successful businesses in Canada eventually have to deal with the intricacies of the Canada Revenue Agency (CRA). They have no easily accessible resource to inform them about their tax obligations, in contrast to official government programs or training courses for business owners. Incidents such as inaccurate business tax filings and improper collection or remittance of GST/HST are frequent causes of CRA tax audits. Business immigrants may find the tax filing process, which involves reporting offshore income and assets to the CRA, to be extremely complex and time-consuming especially if they keep sizable international enterprises and holdings.

This article focuses on the particular difficulties that business immigrants could have while interacting with the taxation system in Canada. The objective of this essay, which is the third in the series “A Canadian Tax Lawyer’s Guide for New Immigrants in Canada,” is to help newcomers understand the nuances of Canada’s tax system.”

Business Structures in Canada 

One of three company structures is most common in Canada: corporations, partnerships, and sole proprietorships. Depending on the form of the business entity, there can be considerable differences in the tax filing process. Partnerships and sole proprietorships don’t have independent legal identities from their owners. This implies that the business owners’ personal income is closely linked to the earnings made through these arrangements.

Corporations, on the other hand, are unique legal entities that file taxes on their own behalf, apart from their owners and operators, and frequently benefit from favorable tax rates on their commercial profits. Nevertheless, choosing to incorporate a corporation entail keeping corporate documents, filing tax reports, and creating annual financial statements.

Guide to Filing Business Tax Returns in Canada 

With the exception of small suppliers, all businesses in Canada that provide products and services are required to register for and collect the Goods and Services Tax/Harmonized Sales Tax (GST/HST). According to the definition provided by the Canada revenue Agency (CRA), small suppliers are companies whose total income for the previous four calendar quarters combined has not exceeded $30,000. Revenue from the sale of capital property, financial services, and goodwill is not included in this. Generally speaking, a company no longer qualifies as a small supplier if its income exceeds $30,000 in any given calendar year, excluding certain circumstances.

GST/HST registrants must submit their returns on a monthly, quarterly, or annual basis. The precise dates by which these returns must be filed depend on the frequency selected, which is based on the total yearly revenue of the business.

If your company is unincorporated and owned by one person, as in the case of a sole proprietor, you are responsible for all business risks, liabilities, and obligations. To pay business income taxes, sole proprietors must file a T1 personal income tax and benefit return, which requires them to declare any business profits or losses. You will also be required to provide financial statements or business statements using the appropriate CRA forms, depending on the nature of your company.

Any agreement between two or more people, businesses, or partnerships that get together to undertake a profit-oriented company is referred to as a partnership in Canada. As long as an activity is taken within the normal course of conducting business, all partners in a partnership are jointly liable for each other’s activities. As in the case of sole proprietorships, the partnership or business does not pay income tax; instead, each partner is responsible for disclosing on his or her own tax returns the amount he or she received from the business.

A partnership doing business in Canada will additionally be required to file Form T5013, the Statement of Partnership Income, for each fiscal period in addition to submitting financial statements or business statements using CRA forms.

Corporations are considered as distinct legal entities and are entitled to advantageous tax rates in some circumstances, in contrast to partnerships and sole proprietorships. For example, the current net tax rate for private corporations under Canadian ownership that receive the small business deduction is 9%. However, as of 2023, general corporations will pay an effective corporate tax rate of 15%. There are also provincial tax filing requirements and tax rates that will be imposed. However, completing a company tax return is usually more complicated than filing a personal income tax return.

Each tax year, Canadian firms are required to file a company income tax return (T2). To fully understand your corporation’s tax requirements, it is advised that you speak with a knowledgeable Toronto tax firm if you plan to incorporate your business.

Harmonized Sales Tax, Input Tax Credit, and Goods and Services Tax 

In Canada, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) is a unified taxation system. The applicable tax rate is determined by the transaction’s location, and the current rates are as follows:

  • 5% in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon.
  • In Ontario, the rate is 13%.
  • 15% in New Brunswick, 15% in Newfoundland and Labrador, 15% in Nova Scotia, and 15% in Prince Edward Island.

With the exception of situations in which the small supplier rule is applicable, any company that offers taxable supplies in Canada may be obliged to register for and collect GST/HST. A business is eligible to be considered a small supplier for that year and is not required to register for GST/HST if its total taxable supplies or taxable business revenue over the preceding four calendar quarters did not exceed $30,000. Significant taxes, fines, and interest payments to the Canada Revenue Agency (CRA) may arise from noncompliance with the GST/HST legislation.

Businesses must register for GST/HST and file the proper reports in order to receive Input Tax Credits (ITCs), which are obtained by deducting the GST/HST paid from the GST/HST collected. Only purchases and costs incurred in connection with business operations are eligible for ITC claims. The CRA may examine supporting documentation such bank statements, invoices, and receipts in order to audit ITC applications. In the worst situation, an ITC claim that is rejected or only partially approved may result in a Gross Negligence Penalty.

Please see our article, which explores the nature and implications of GST/HST Gross Negligence Penalties, for more comprehensive details.

Pro Tax Tips: Keep in Mind Different Tax Deadlines

A number of different tax returns have different dates that are set by the Canada Revenue Agency (CRA), which is the tax collection agency in Canada. Although annual modifications may be made to these deadlines, a recurring pattern is usually observed. With the exception of April 30 being a Sunday, people had until May 1, 2023, to file their personal income tax forms and make their tax payments. The personal income tax deadline is probably going to return to April 30 in 2024.

Self-employed people frequently benefit from an extended filing deadline, which is usually extended until June 15 or the first working day after that date each year. Corporations, on the other hand, have deadlines that are determined by the end of their fiscal year. Partnerships, on the other hand, must submit information returns by March 31, 2023.

Keep track of these deadlines is critical for business owners. Penalties and interest charges may be imposed if they are not met. If you’re unsure which dates apply to your tax duties as a business owner, or if you’re looking for experienced tax planning advice, our team of seasoned Canadian tax lawyers is here to help.

FAQ: 

Does Income from Foreign Businesses Have to be Reported on My Canadian Tax Returns? 

Depending on their tax residence status, a taxpayer may or may not be required to report their overseas income in Canada. Earnings from sources outside of Canada are included in the global income that must be reported by a resident taxpayer in Canada. They also have to use Form T1135 to declare offshore assets. On the other hand, non-resident is only required to disclose income that he or she have received within the borders of Canada.

If you are having problems figuring out where you file your taxes or have any questions about your tax filing obligations, please don’t hesitate to contact our knowledgeable Canadian tax lawyers for professional advice.

Will My Immigration Status be Affected by My Taxes? 

Although immigration and taxes are usually unrelated topics, there are some circumstances in which the Canada Revenue Agency’s (CRA) activities may have an effect on an individual’s immigration status. As per the definition provided in section 380 of the Canadian Criminal Code, tax fraud is considered a criminal act. Charges of tax fraud may require immigrants to submit the allegations to Immigration, Refugees and Citizenship Canada (IRCC). Depending on the person’s immigration status, a conviction may lead to criminal inadmissibility. It is recommended to obtain legal guidance from our skilled Canadian tax lawyers as soon as possible if you find yourself the target of any CRA tax actions.

A further situation concerns people who are applying to become citizens of Canada. A person may only become a citizen of Canada by fulfilling the requirements of the Income Tax Act, which state that one must file “a return of income in respect of three taxation years that are fully or partially within the five years immediately before the date of their application.” This is stated in section 5(1)(c) of the Canadian Citizenship Act. This prerequisite is necessary for individuals who want to become citizens of Canada.

Disclaimer: 

Only general information is provided in this article. Only as of the publishing date is it current. It might not be current anymore because it hasn’t been updated. It cannot and should not be relied upon to give legal advice. Every tax issue is unique to its circumstances and will not be the same as the scenarios in the articles. You should speak with a Canadian tax lawyer if you have any specific legal inquiries.

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