What is corporate tax ?
The second form of tax that we will explore is corporate income tax. If you operate your business through a corporation in Canada, then your corporate entity is responsible for filing and paying corporate taxes.
Corporate tax is a direct tax imposed on the profits of a corporation. In Canada, corporations have to pay taxes to the Canada Revenue Agency. This is known as federal corporate tax. Plus, it must pay taxes to the province that your company is headquartered. For example, if your company is incorporated and set up in Alberta, you will have to pay and file a provincial corporate tax return with the Government of Alberta.
The profits are based on your income and expenses made during a financial year. A corporate financial year can be any 12-month period for example, 1 July to 30 June each year. It does not have to be a January to December calendar year. However, once you file your first corporate tax return, the company year-end will be fixed. You cannot change it afterwards unless the CRA gives you permission.
When choosing a financial year-end, you should consider your business cycle and the availability of accountants. Like most accountants, I also suggest not choosing a December year-end because accountants get flooded with tax work that have to be completed before the 31 May deadline. That it is a difficult workload to manage. But if you choose a year-end like June, August, September when it is quieter, your accountant won’t feel rushed and he can provide you with better service.
It is a great idea to consult an accountant with choosing a year-end for your company. The choice of financial year-end can save you taxes. I will use the example of my movie production client. When they approached me, they originally wanted a 30 November year-end for their company. However, when I analyzed their cash flow cycle, it made better sense to choose a 31 October year-end. It was a good decision because my client saved at least $20 000 in taxes that it would have had to pay on their film production grants. So please make sure to choose your corporate financial year-end wisely.
Important Defintions
The main components of a corporate tax return are your income and expenses.
Income – is the revenue or money coming into your company from the worldwide sales of goods and services or investment income.
Expenses/Deductions – money spent by the corporation for business purposes. Examples include advertising, salaries and wages, printing and stationery, office rent etc.
