When To File:
Corporate tax returns are due 3 months after the corporate year-end and any tax owing is due on that date.
Pre-paying Tax: Are installments required?
If you owe more than $3,000 in corporate tax you are required to pay by monthly installments, in advance of the year-end. Failure to make installment payments will result in interest charges for late payment even if you pay the full amount when filing.
There are various ways to deal with owner/managers taking funds from the corporate bank account. At its simplest, the funds withdrawn are termed “shareholder loan”. You are permitted to “borrow” funds from your own corporation as long as they are either repaid within a year and/or turned into salary or dividends. Withdrawing funds includes cash or transfers out of the business bank account as well as the payment of any personal bills through the company bank account.
Corporate owners can earn a salary, as any employee would. In this case, payment to the owner would be on a regular basis and payroll taxes would be due (in most cases) by the 15th of the following month, for each month there are wages paid.
What most small companies (sole shareholders or closely held corporations) do is to borrow funds as needed from the company and then decide at year-end how to treat that money. If we decide to turn it into wages, the tax rule is that those wages are “deemed” to be paid six months after the corporate year-end.
And the payroll tax on those wages is due on the 15th of the following month (or the 10th of the month following in the case of very high payroll amounts). For example: If your corporate year-end is September 30th and you have withdrawn $50,000 over the course of your business year, we may decide to give you a salary of $50,000. Because you have not already paid tax on the funds – at the time of withdrawal they were borrowed funds – when we make the decision at year-end, we will need to declare a bonus.
Bonuses are deemed to be paid six months after the corporate year-end (even if the money has already been taken out, don’t forget we termed it a loan until we made the decision to call it a bonus). In this example the corporation will show a salary of $50,000 being paid in March of the following year. (So a September 30th, 2016 year-end bonus would be deemed paid in March 2017). The payroll tax must be paid, then, by April 15th. The owner of the corporation will then receive a T4 slip for the $50,000 of wages (bonus) showing both the income and the employee share of the CPP along with any tax paid.
Corporations paying bonuses are only legally required to remit the Canada Pension (CPP) portion of the payroll taxes. You can certainly pay more into the payroll tax account, to cover the income tax portion – but you can also have the company ONLY pay the CPP portion. If you choose to do this, the owner receiving the bonus will be personally responsible for the income tax. That tax will be due on April 30th of the year following when the bonus was deemed paid. Please note: if your tax due is higher than $3,000 CRA will require you to pre-pay by quarterly installments in the future.
CPP is calculated at 10.25% of earnings above $3,500 and below $58,700 (the maximum earnings in 2020, it changes slightly from year to year). For the calendar year 2020 that means if you earned the maximum $58,700 or higher, the CPP due would be $5,796. This is the maximum CPP payable for an employee and includes both the employee and employer portion of the benefit. If you are self-employed or salaried through your own corporation you will be responsible for both parts of the CPP.
In some cases, we will decide to declare a dividend instead of, or in addition to the owner’s bonus. Dividends are after-tax corporate profits paid out to shareholders. If we do this, it means you WILL have corporate tax owing and will need to pay careful attention to the deadline for payment and filing your returns (3 months after the corporate year-end). And you will likely find yourself paying monthly corporate tax installments in the future. Receiving a dividend personally also means that you will have, as yet, untaxed personal income. Dividends are reported on T5 slips, generally issued by our office, for inclusion in your personal return.
- Keep accurate and up to date books on your own or through our office;
- Provide all your bank statements, invoices, receipts and financial and tax records to our office soon after the year-end of your corporation.
Doing these two things will allow us to prepare your tax returns and financial statements by the deadline and to do proper tax-planning for both you and your corporation. You will avoid unnecessary interest and penalties from CRA.