Taxation can be a big problem for small businesspeople. It helps to break it down into smaller more manageable challenges. How does one manage to plan for HST, corporate, and personal income tax?
HST is straightforward. HST tax collected minus HST (input tax credits-ITCs) paid out, for a given time period. Good records are important. Find out how often your business must report and file, and that is taken care of. There are no predictions, just pay on time to avoid penalties. HST is very important, but not complex.
Corporate/business taxes are more complicated. There are three ways to predict 2013’s income, and from there the installments your business must pay. It cannot be perfectly predicted; maybe your business has a surge of revenue; maybe there are unforeseen expenses, maybe a tax deduction runs out. All affect taxable net income, and by extension your taxes payable. Try to make the best estimate you can, and at the end of the year pay the outstanding tax, if any.
Personal taxes are even more difficult to predict. A business could give an owner a tax-managing proper mix of dividends and salary. Once that is done, personal revenue is fairly predictable. However, tax deductions and credits are hard to predict. What if you make a political donation (75% tax credit on the first $400, provincial or federal levels)? What if you have an extreme jump in medical expenses? What if your spouse changes working status, a move that could affect your tax credit status? Again, try to make the best prediction possible, but personal taxes can be difficult to predict.
Generally, there are a few options on tax predictions (corporate and personal). The more the CRA influences an option, the less chance there are of penalties (vs your predictions). Still, the best prediction from any source might not anticipate a huge increase in taxes payable. If, for example, the CRA sends an installment notice it is usually based on historical data; if you pleasantly surprise everyone with great profits the taxes payable will be bigger at the end of the year. If you suddenly increase your profit, a checkup mid-year with your tax accountant may be in order.
That breaks down taxes into manageable areas: HST, corporate and personal. Where ever possible, HST and corporate are paid from the business bank account, and personal paid for from the personal bank account. Payroll, and other taxes, are usually derived from activity such as salary.