What’s New for 2022 Tax Returns:
Updated January 2023
Important News Flash for Owners/Managers of Incorporated Businesses
When To File:
Corporate tax returns are due 6 months after the corporate year-end, however any tax owing (in excess of pre-paid installments) is payable 3 months after the year-end.
Pre-Paying Tax: Are installments required?
If you owe more than $3,000 in corporate tax you are required to prepay the subsequent year’s tax. Typically, the tax is payable in monthly installments, but some circumstances allow for quarterly payments. Failure to make installment payments will result in interest charges for late payment even if you pay the full amount when filing.
How to Take Money Out of Your Corporation
There are various ways to deal with owners/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 At its simplest, the funds withdrawn are termed “shareholder loan”.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 the loan is repaid within a year 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.
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.
Taxing Money Withdrawn from the Corporation
Corporate owners can earn a salary, as any employee would. The salary can be paid to the owner 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. Corporate owners must pay into the Canada Pension Plan (CPP), though are not eligible for and do not pay into EI.
In addition to OR instead of a monthly payroll, we may, at year-end, declare that funds withdrawn by the corporate owner were a bonus. For example: If your corporate year-end is September 30th and you have withdrawn $50,000 over the course of your business year, but did not declare this as salary and pay monthly payroll taxes, we have options. One option is for you to repay the funds – as a tax-free loan. The second option is to declare a bonus.
If we decide to declare a bonus at year-end, the rule is the bonus is “deemed” to be paid six months after the corporate year-end (even if the money was withdrawn earlier).
Payroll taxes on wages/salaries/bonuses are due on the 15th of the month following payment (or the 10th of the month following, in the case of very high payroll amounts). In this example, the corporation will show a bonus of $50,000 being paid to the owner in March of the following year (6 months after the corporate year-end in September). The payroll taxes 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 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 opt to have the company pay ONLY 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 to be paid. Please note: Individuals, like corporations, will be required to prepay tax by installments if their tax owing the previous year was higher than $3,000.
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 a dividend is declared, it means you WILL have corporate tax owing and will need to pay careful attention to the deadline for payment and filing your returns. Receiving a dividend personally also means that you will have personal income that has not yet been taxed. Dividends are reported on T5 slips, issued by our office, for inclusion in your personal return.
The decision about whether to take salary, bonus or dividend or a combination is not static. This is something we look at each year and plan for, in discussion with our clients.
Corporate Owner Responsibilities
- Keep accurate and up to date books on your own or ask us about bookkeeping services.
- 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.
Corporate Owner Deadlines
- One month after the corporate year-end, provide all required materials to our office.
- 3 months after the corporate year-end, pay any additional corporate tax owing.
- Monthly, pay corporate tax installments if your prior year tax due was over $3,000.
- Monthly, by the 10th or the 15th (depending on the amount of annual wages) make payroll tax (ETD) payments for wages paid the month prior.
- 6 months and 15 or 10 days (depending on the size of the annual bonus) after the year-end of the corporation, pay any payroll tax due on the bonus paid to the owner.
- February 28th of the year following the corporate year-end, file T4 slips to report wages and bonuses paid the previous year and T5 slips to report dividend income, if any. Our office will prepare and file these slips for you if we have prepared your corporate year-end.