Taxes for Canadian Startups: The Basics

Overview of Tax Obligations

• Corporate Income Tax: You'll pay this on your profits which is 15%, but there's a bonus! Small businesses get a lower tax rate on the first $500,000 of their active business income at 9%. That's a pretty sweet deal to help you get off the ground.
• Goods and Services Tax/Harmonized Sales Tax (GST/HST): This is a tax you collect on most sales (anywhere between 5% to 15%). Remember, you're acting as a collection agent for the government here, so make sure you charge it and send it on its way!
• Payroll Taxes: Got a team of amazing employees helping you build your dream? You'll need to account for these taxes too, including Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax withholdings.

Key Tax Deadlines in Mid-2024

• September 30, 2024: Deadline for corporate income tax filing for startups with a fiscal year ending on June 30.
• December 31, 2024: Final deadline for making tax-deductible contributions to employee benefit plans.

Maximizing Tax Credits and Deductions

Scientific Research and Experimental Development (SR&ED) Tax Credits

Start-Up Costs Deduction

Investment Tax Credits (ITCs)

Strategic Tax Planning for Year-End

Income Splitting (with Caution!)

Deferring Income & Accelerating Expenses

Reviewing and Adjusting Tax Estimates

Mid-Year Check-In: Stay on Top of Your Taxes

Benefits of a Mid-Year Check-In:

• Catch Changes Early: Avoid unpleasant shocks by accounting for changes in income or expenses.
• No More Penalty Pit Stops: Keep your estimates up-to-date and avoid penalties from the CRA.
• Peace of Mind for the Journey: Focus on growing your business with confidence, knowing your taxes are under control.

Making Adjustments: A Simple 3-Step Process

Engage with Tax Professionals

Wrapping it up

Understanding Capital Cost Allowance (CCA)

What is Capital Cost Allowance?

How CCA Works for Farmers

Recent Updates to CCA Rates for 2024

Overview of Changes

Impact on Specific Farm Equipment

Maximizing CCA Claims for Optimal Tax Benefits

Strategic Planning for Purchases

Proper Record-Keeping

Consulting with Tax Professionals

Conclusion

The Importance of Accurate Record-Keeping for Patio Season

Boost in Sales and Customer Traffic

Managing Tips and Gratuities

Inventory Management

Best Practices for Patio-Specific Expense Management

Distinguishing Patio-Related Expenses

Seasonal Staffing Costs

Utilities and Maintenance

Ensuring Compliance with Tax Regulations

Sales Tax Collection and Reporting

Income Reporting for Seasonal Employees

Claiming Patio-Related Expenses

Conclusion

What are the key changes introduced in Budget 2024?

• Capital Gains Tax: The biggest shift revolves around capital gains tax. Previously, only half of capital gains were included in taxable income. Budget 2024 introduces a tiered system:
  • Gains under $250,000 for individuals remain subject to the 50% inclusion rate.
  • Gains exceeding $250,000 for individuals and all capital gains for corporations and trusts now face a 66.67% inclusion rate (increased from 50%).
• Lifetime Capital Gains Exemption (LCGE): The LCGE, which exempts a portion of capital gains on qualified small business corporation shares and certain properties, has been increased to $1.25 million (from $1,016,836). However, indexation to inflation is paused until 2026.
• Canadian Entrepreneurs' Incentive (CEI): To encourage investment and growth, the budget introduces the CEI. This offers a reduced capital gains tax rate (50% inclusion) on up to $2 million of qualifying lifetime capital gains for eligible individuals. The $2 million limit will be phased in gradually over the next decade.

How will the budget 2024 in Canada impact different business types?

• Startups & SMBs: Given the hike in capital gains tax on larger sales, it might discourage some exits. However, note that the CEI provides a silver lining for the founder, who has significant ownership of the business. We advise you to structure the ownership and exit with a strategy that will maximize your CEI benefit.
• Non-Profits: Of course, nonprofits don’t have to pay income tax. However, unrelated business income tax (UBIT) may apply to some of the activities of your nonprofit. There are minor changes in UBI calculations proposed in the budget for 2024.
• Franchise Businesses: Typically, these are independent businesses, but the franchisor may hold the IP rights. Here, the change in capital gains would impact sales in the franchise. 
• Family-Owned Businesses: Budget 2024 does offer some relief with the LCGE. With this, businesses can transfer large portions of business to their family members through tax-free transfers. Explore different succession strategies to take advantage. 

Tax planning strategies you can implement 

• Firstly, review the capital gains potential. You must assess your business's potential for capital gains in the future. It can help determine the impact of the new tax rates, and you’ll plan accordingly.
• Secondly, consider your business structure. If there is an optimal business structure in place, it can influence tax implications. Find out if you have to restructure your business for maximum benefit under the new tax regime.
• Third, maximize deductions and credits. Canadian businesses have many tax credits and rebates available to them. Utilize these to minimize your taxable income, especially if you face higher capital gains taxes.
• Finally, seek professional advice. Consult a qualified tax adviser to understand the complexities of the new tax landscape and develop a personalized tax plan for your specific business.

Wrapping it up!

How does crypto taxation work in Canada?

• Purchase or selling of crypto as inventory: For businesses that are selling or buying crypto as their core operations, their transactions will be treated as business income. Thus, they will not be subject to capital gains tax, but to income tax.
• Crypto Mining: The mining rewards that are given for validating crypto transactions will be considered income. They will be taxed accordingly.

• Paying contractors or employees in crypto: It will become a deductible expense for the business when they are being paid at a fair market value of the crypto (at the time of payment).

Why is proper recordkeeping important here?

• Maintain accuracy of transactions: Given its crypto, document everything, starting from date to transaction type and amount involved, among others.
• Have reliable accounting software: Use specialized software that can understand crypto transactions and record accordingly. It will simplify tax calculations.
• Keep relevant documents handy: You must retain copies of supporting documents, such as exchange receipts, wallet statements, and documents related to crypto activities.

Some best practices for crypto tax reporting 

1. Categorize all your crypto transactions as business income, capital gains/losses, or other relevant tax categories.
2. The cost basis refers to the original purchase price of your crypto assets. This is crucial for calculating capital gains or losses.
3. Businesses file their crypto-related income and expenses on Form T1 Supplement - Detailed Transactions.

• Staying non-compliant with the CRA's crypto tax regulations can lead to hefty penalties and interest charges. Thus, by having a system in place, one can avoid penalties and interest charges.
• Demonstrating responsible tax practices builds trust with investors and regulatory bodies. It also helps raise funding for the business, when needed.
• Clear and compliant records are essential for future audits and financial planning. Your business gets a chance to grow with confidence. 

Wrapping it up!

What’s the impact of rising interest rates?

• Startup Funding: Startups often depend on venture capital, angel investors, or bank loans to fuel their initial growth. When interest rates are rising, it can make it costly for startups to fund their businesses, and it may also slow down the fundraising process.
• SMBs and Working Capital: Small and medium-sized businesses frequently make use of lines of credit to manage day-to-day operations and seasonal fluctuations. When there is an increase in rates, it will make managing working capital costly, and it will further impact profitability.  
• Franchise Expansion: Pretty often, franchises have to finance themselves to open new locations. In light of rising interest rates, it will be difficult for these businesses to secure loans, which will further cause problems with expansion. 

• Reduce Consumer Spending: Now that borrowings are expensive, consumers will tighten their belts, ultimately decreasing their demand for goods and services. It will severely impact the business.
• Slower Economic Growth: Ultimately, the high interest rates restrict overall economic activities, which does restrict market opportunities for businesses.  

How can businesses mitigate risks and secure financing?

As we learned, rising interest rates can pose serious challenges for growing businesses. Here, to weather the storm, they need to proactively implement these strategies: 

• Cash Flow Management: Businesses, especially small ones, must maintain healthy cash flow reserves, as periods of economic uncertainty can become crises real quick. They need to analyze expenses, identify areas for cost reduction, and make debt repayment a priority.
• Financial Forecasting: You should factor in interest rate hikes while making a financial forecast. Due to this, your business will be able to anticipate future financial needs and stay aware of their borrowings and investments.
• Debt Consolidation: For a business with multiple loans and different interest rates, it is better to turn them into a single loan with a low rate of interest to simplify debt management and reduce borrowings.
• Alternative Financing Options: You can explore alternative options for financing. For example, you can sell outstanding invoices for immediate cash, lease equipment instead of purchasing it, and sell a portion of future sales receivable for immediate cash.

Try these hedging strategies for existing debt

• Swapping interest rates: In this financial contract, one can lock in their fixed interest rate for a specific period, which will protect them from future rate hikes. 
• Interest Rate Caps: Businesses can set the maximum interest rates they are willing to pay on the variable-rate loan. It will offer protection against some rate hikes. However, it may also come with an upfront cost. 

Wrapping it up!

What is the Canada Carbon Rebate for Small Businesses?

• It must be a Canadian-controlled private corporation (CCPC)
• The business must be filing a tax return for the 2023 taxation year by July 15, 2024
• There must not be more than 499 employees throughout Canada in the calendar year corresponding to the fuel charge year being claimed for.

How much can a business get?

1. Number of employees in every province: Depending on the number of employees your business has in each province and the federal fuel charge for these provinces, you can get a rebate. These provinces are: Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.

1. The payment rate: The Ministry of Finance will set up specific payment rates for every province. It will also set the fuel charge for the year. These rates will be announced when the government receives sufficient data from the 2023 tax filings.

How do I apply for the refund?

What will happen in the future?

What will it help a business owner?

• The rebate will offset the fuel charge expenses. Thus, a business will have more cash flow, which they can use to fulfill other business needs.
• Receiving a rebate can improve your overall financial health. It will assist in making short-term planning easier.
• Also, with this program, we can understand the government's commitment to supporting small businesses.

We're here to help!

After serving the industry for the last two decades, we at CJCPA understand that dealing with new government regulations and programs can be difficult without help. 

Budget 2024: New Measures Affecting Information Gathering by the CRA 

Understanding the current challenges

What are some new measures for information gathering?

• Notice of Non-Compliance: CRA will issue this notice if your business fails to comply with a CRA request for information or assistance. CRA and the courts can review this notice.
• Penalties for Non-Compliance: Businesses that receive a non-compliance notice have only two options for the daily penalty to stop. Either comply promptly or wait till the notice is vacated.
• Questioning Under Oath: CRA can now demand documents and information under an oath or solemn affirmation. This will add a layer of seriousness to requests for information.
• Strengthened Compliance Orders: If a business is persistently non-compliant, there are harsh consequences. CRA can seek a court order that compels disclosure of information. If the business still refuses to comply, they’ll have to pay a 10% penalty on the tax payable by the business. Even though it is limited to situations where tax owed exceeds $50,000, it is still a significant amount for small businesses. 
• "Stop the clock" Rules: With these rules, the reassessment period of a business extends while they are still seeking judicial review of a CRA request. It will also happen during the time a notice of non-compliance is outstanding. 

What does this mean for your small business?

How can CJCPA help?

• First, we understand your obligations when dealing with information requests.
• Then, we prepare a comprehensive response to CRA inquiries.
• Further, we’ll represent your business during interactions with the CRA.
• Besides, we’ll also advise you on strategies that minimize the risk of non-compliance penalties.

Summing it up!

Budget 2024 Delivers Big Benefits for Small Rental Property and Tech Businesses 

So, what exactly is the ACCA?

Key ACCA benefits in the Canada Budget 2024!

• For those planning to build a rental property

• Invest in technology and see savings soar.

Who qualifies for these ACCA benefits?

1. Timeframe for eligible projects: New construction must begin on or after Budget Day and before January 1, 2031, and be available for use before January 1, 2036.
2. Eligibility Requirements (property): For a property to be eligible, it must be a new purpose-built rental complex with at least four units or ten rooms, and 90% of units must be for long-term rentals. Renovations are not eligible, but new additions to existing structures can be.
3. Restrictions: Previously owned property by the taxpayer or a non-arms-length person, or property acquired through a tax-deferred rollover, is not eligible.
4. Short Taxation Year: ACCA is applied in a short taxation year (less than 12 months).

Wrapping Up!

Interest Deductibility for Purpose-Built Rentals: Budget 2024 Update for Canadian Businesses

What are the EIFEL rules?

What’s the exemption for purpose-built rentals? 

• Building new purpose-built rental properties
• Acquiring existing purpose-built rental properties

What’s the eligibility criteria for rental properties?

1. Minimum Unit Count: The property must have either:

• At least four private apartment units (with private kitchen, bathroom, and living areas)
• Or, at least 10 private rooms or suites

1. Long-Term Rental Focus: At least 90% of the residential units must be held for long-term rentals (excluding short-term stays like vacation rentals).

What are some benefits and considerations related to this exemption?

• Elective Exemption: Given it is an elective exemption, businesses have to choose and use it while thinking of the impact on tax filing strategy.

• Recordkeeping: The business must also keep proper documents of their financing details and property use. It is an essential requirement for claiming the exemption when tax audits happen.

Next Steps: Consulting with a Tax Professional