Businesses in Canada can take many different forms, each of which has their own unique set of rules and regulations. Despite this, in all instances, well organized and timely financial information provides a business owner with a consistent year-over-year overview of their company's performance. This facilitates a more thorough understanding of the financial trends within your business that Donovan aims to help you identify as well as potential opportunities and/or risks.
By working with a Chartered Professional Accountant, you can ensure that you are well positioned to take advantage of those deductions and elections eligible to your type of business and you remain compliant and up to date with all required business tax filings. This can range from reporting your income and expenses for the year, reporting GST/HST collected and/or paid, maintaining compliance and eligibility for the Lifetime Capital Gains Exemption regulations, reporting shareholder and other taxable disbursements to the CRA, reporting pass-through monies from non-resident corporate affiliates, etc.
Corporations can range from one private shareholder to millions of public shareholders. In either instance, the concept is the same, a share represents ownership in the underlying corporation. As an owner, you are entitled to a proportionate share of the corporation’s value. This value can be derived through the payment of dividends from accumulated after tax income inside of the corporation or through the sale of the share to another individual.
Dividends paid to shareholders represent monies available after the imposition of corporate taxes. As such, recipients of dividends (from Canadian companies) receive a dividend tax credit on their personal tax return in order to compensate the shareholder for these taxes already paid by the corporation. The amount of dividend depends on whether the income was taxed under the general corporate tax rate (eligible dividends) or under the small business rate (other than eligible dividends).
Canadian controlled corporations (those with net taxable income under $500,000) are eligible for a reduced tax rate on those earnings. Due to varying provincial tax rates, this reduced tax rate will be anywhere between 12.5% to 15%. This lower rate is intended to provide small businesses with additional monies to reinvest in the capital assets required to continue to grow the company.
As a Chartered Professional Accountant, Donovan works with each corporation to maintain compliance with all required filings while also working with the business owner to minimize the taxable impact of current and future distributions from the corporation.
Partnerships typically take on two forms: general and limited. Unlike corporations, a partnership is taxed at the partner level on their personal tax return. This means that rather than the partnership paying tax, the individuals partners are taxed on their personal tax return at their marginal tax rate. This is typically an unfavorable result as there is little room to determine the timing of income and expenses.
A general partnership follows the traditional structure where two or more persons join together in a business venture. Each partner will typically have contributed assets or services in order to form the partnership (though sometimes not equally). Due to the inherent trust required to operate effectively as a partnership, this form of partnership has fallen out of favour over the years. That being said, this business structure still has merits and can result in relatively low compliance costs.
A limited partnership limits the limited partner’s exposure to losses to the extent of their investment in the partnership (similar to that of an investment in a corporation). This is a sizable benefit from a general partnership as it minimizes the potential downside risk of owning partnership shares. These partnerships typically have a higher compliance costs associated with them due to the annual filings required and complicated recordkeeping.
In the United States, a corporation can take on many forms. A traditional corporation is taxed under the corporate tax rate but can elect to be an S-Corporation (benefits discussed below). Whereas, an LLC is taxed as a partnership but can elect to be treated as a corporation.
As a traditional corporation, all earnings are taxed first inside of the corporation and then again when distributed to it’s shareholders by way of dividends. This double taxation has historically made traditional corporate structures undesirable for smaller, privately held companies. Despite the reduction of corporate taxes as a result of the Tax Cuts and Jobs Act of 2017, the issue of double taxation still remains.
For eligible corporations, election as an S-Corp can have very favourable impacts. This is due to the fact that, similar to a partnership, all earnings inside of an S-Corporation are only taxed at the shareholder level. Not only does this eliminate the issue of double taxation, but also allows the shareholder to benefit from a lower margin tax rate than the 35% tax historically imposed on earnings inside of a United States corporation.
Each structure comea with their own unique reporting requirements and regulations. By working with a qualified United States tax professional, you can rest easy knowing you are compliant and positioned to avoid traditional pitfalls, can stay abreast on changes in the respective tax legislation and minimize your taxes.