New to the world of corporate tax returns? Not quite sure how they differ from the personal taxes you’ve been filing for years? Our Chestermere accountant breaks down the major differences between the two in this week’s article.
Knowing your T2s from your T1s is part and parcel of running a top accounting firm in Chestermere. But if you’ve recently incorporated your business and are unfamiliar with corporate tax returns, it can be quite an overwhelming experience. With more on how corporate and personal tax returns differ, here’s our Chestermere CPA with a breakdown of their major differences.
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The Main Differences Between Corporate and Personal Tax Returns
You’ve probably got a decent idea that corporate and personal tax returns are different. If you were previously a sole proprietorship before incorporating your business, then you’ll have an even greater idea of the differences. But for those who don’t, here are the biggest differentiators.
1. Tax Rate
By far the biggest difference between personal and corporate tax returns is the rate that’s used to determine how much money you owe the government. Here in Alberta, the corporate tax rate has recently been slashed to only 8 per cent as the UCP government attempts to spur job creation. The federal corporate tax rate is only 9 per cent if you’re able to claim the small business deduction for a grand total of 17 per cent. Compare that to the 15 per cent imposed by the federal government on the first $48,535 you make along with the 10 per cent levied by the province on the first $131,220 you bring home personally, and that’s a whopping difference.
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CORPORATE TAX RETURNS CHESTERMERE
2. Deadlines
For personal taxes, the deadline for filing is the same every year (with the exception of this one thanks to COVID-19). For corporate tax returns, the filing deadline is the same for every year. But how that deadline is determined is different for every corporation. Corporations have what’s called a fiscal year-end. This fiscal year-end is what’s used to determine the filing deadline for your T2 corporate tax return. If your fiscal year-end is December 31 (a popular choice amongst corporations) then you have six months from that date to file your corporate taxes. That means a corporation with a fiscal year-end of December 31 must file their corporate tax return no later than June 30, otherwise they run the risk of being hit with late filing penalties.
THE BENEFITS OF INCORPORATING YOUR BUSINESS
3. Complexity
A corporate tax return is generally much more complex than your standard personal one. Your bookkeeping has to be in order and an accurate profit and loss statement is essential. The only time personal tax returns reach the level of sophistication that is inherent with corporate ones is when there are large investment portfolios to contend with. That’s when accountants really earn their keep.
4. Deductions
As a corporation, you’re eligible to deduct the expenses you incur to generate income. According to the CRA, so long as it is ‘reasonable’ and a current expense (not a capital one) then you are allowed to deduct it. This even extends to professional services such as hiring an accountant to do your taxes. Some of the main business deductions allowed by the CRA include:
- Advertising and promotions
- Meals and entertainment
- Use of a motor vehicle for business (be sure to keep good mileage records)
- Home office
- Education
- Property taxes
- Rent
- Travel
- Telephone and utilities
By applying all these deductions to your T2 corporate tax return, you can reduce your tax liability substantially. You’re obviously not allowed to take advantage of these deductions if you’re filing a personal tax return.
So there you have it. Those are the main differences between corporate and personal tax returns, in a nutshell. While having a corporation provides numerous tax advantages and minimizes your personal liability should things go south with your business venture, there is a lot more housekeeping that goes into maintaining it. And while you may be tempted to prepare your corporate tax return yourself, you’ll most likely save a lot more money by hiring a professional accountant who will make sure you’re taking advantage of all the deductions and credits available to you.
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