Dividing your personal and business income is always challenging particularly when it comes to taxes. Once your business is incorporated, it becomes an independent entity: capable of being taxed, liable for lawsuits and all other actions that could be targeting an individual. Considering these facts, the question remains: are you still required to file a personal return, even if your corporation income is already taxed?
The brief answer to this question is YES. In Canada, filing a tax return on income from your corporation does not exempt you from being required to fill out a tax return on your personal income. Sure enough, there are many caveats to this simple rule.
First, the nature of the corporation you run determines the type of return you must file. For example, if you are a non-profit business your company is not subjected to the same tax consequences as a for-profit company, even though your personal tax liability may be equivalent. Additionally, your financial ramification will be different if you are structured as a private or a public enterprise. As a matter of fact, in Canada, all Canadian controlled private corporations enjoy a significantly larger tax benefit than foreign-owned entities. When you file your corporate papers, make sure you discuss with your accountant about possible tax advantages based on types of incorporation.
Plus, the field in which you do business will affect your tax liability and initial start-up cost. For example, if you are doing business exclusively in Montreal as a sole proprietorship, it is wiser to incorporate provincially as it is less costly. Yet, if you are doing business in other provinces and Montreal serves as your home base, then you may want to consider federal incorporation.
Your corporate structure is another important consideration when filing your taxes. Depending on the method you use to receive a salary for your work, it will impact your corporation’s income as it may or may not be tied to your personal income. If you are considered an employee of the company, your salary will be taxed under your personal income tax; whereas the corporation’s income will be taxed under the corporate return. Selecting the right financial setup when you’re incorporating is crucial. Obtaining expert advice from an accountant beforehand will help you make the most profitable decision for you and your company.
And remember, regardless of your corporation structure, you should always file your personal income on a T1 return and your corporate income on a T2 return.