Owning a business allows you to set your own hours, hire employees who meet your standards and align with your values, and enjoy many other perks that come with being your own boss. However, business ownership also comes with significant responsibilities. One such responsibility is paying business taxes. Managing business tax compliance can be confusing, especially for those who may not fully understand Canada Revenue Agency tax collection policies. Fortunately, entrepreneurs are not required to figure it all out on their own. If you need assistance understanding or paying your Canadian business taxes, the experienced tax attorneys with Jeremy Scott Law may be able to assist you. Call (902) 403-7201 to schedule an appointment to discuss your Canadian business tax needs.
What Is the Canadian Tax Collecting Agency?
In Canada, the federal agency responsible for administering taxes is the Canada Revenue Agency (CRA). This agency handles Canadian taxes for both individuals and businesses. The CRA is responsible for assessing and collecting taxes and levies and delivering social and economic benefits (such as the Goods and Services Tax Credit) through the tax system on behalf of the Canadian government.
The CRA uses the term taxpayer to refer to:
- Individuals
- Partnerships
- Corporations
- GST/HST registrants
- Importers and exporters
- Recipients of GST/HST rebates
- Customs brokers
- Licensees
- International travellers
How Are Business Taxes Paid in Canada?
Self-employed individuals and others whose income is not paid through payroll or source deducted usually make instalment payments on their annual tax obligations. These instalment payments are meant to pay a percentage of what the taxpayer thinks they will owe at the end of the current tax year to minimize what they may have to pay when they file their tax returns. If instalment payments are late or insufficient, the Canada Revenue Agency may charge interest and penalties.
Most corporations make monthly income tax instalment payments throughout the year for the current fiscal or tax year. If these payments are late or insufficient, the CRA will charge interest. For both the self-employed and corporations, any amount still owed is due as soon as their return is assessed or reassessed. Interest is charged at the prescribed annual interest rate, compounded daily, and applied to both the tax and any penalties until the amount is paid in full.
When Are Business Taxes Paid in Canada?
Unincorporated small business owners are required to file an annual tax return by June 15th each year. They also need to pay all taxes due by this date. If a business owner does not file their return and fails to pay the amount due by this date, they will be charged a penalty of 5% of the amount due plus an additional 1% of the unpaid tax for each month that the return is late up to one year. This is in addition to the compound daily interest that is also charged for late payments.
What Happens if You Don’t Pay Your Business Taxes in Canada?
If any taxpayer does not pay the taxes due or contact the Canada Revenue Agency to discuss payment arrangements, collection actions may be taken. These actions can vary depending on the circumstances. In the event that the CRA owes a taxpayer money, this money can be applied to the business owner ’s debt, reducing the amount the CRA owes. On the other hand, directors of a corporation may be held liable, jointly or separately, if the business they manage fails to withhold, deduct, or send the appropriate amounts of taxes.
Payment Arrangements
Business owners may be able to make payment arrangements to pay off their tax debt. They may be required to provide proof of their income, assets, expenses, and liabilities. Additionally, in some cases, the CRA may allow them to postpone payments until their financial situation improves. However, interest and penalties will continue to accrue during the postponement period.
Provide Security
The Canada Revenue Agency may accept security in addition to or in lieu of payment until the tax debt is paid in full. Security that the CRA may accept can include:
- Mortgages
- Standby letters of credit
- Bank letters of guarantee
- Other forms that are liquid (easily converted to cash), near equivalent or equivalent to cash, and realizable on demand without a claim or defense by a third party
Initial Collection Actions
If a taxpayer does not make payment arrangements, provide security, or take other action to acknowledge and pay their tax debt, the CRA may take initial collection action. These actions may include:
- Issuing a Requirement to Pay to garnish wages or other income sources
- Seizing and selling personal or business assets
- Intercepting and taking funds from a third party otherwise payable to the taxpayer (including wages, other income sources, or other amounts of money)
- Intercepting and taking funds from bank accounts
- Other means under applicable statutes or laws
Registration Certificate
If initial collection actions are unsuccessful, the Canada Revenue Agency may take further action. They can register a certificate in the Federal Court of Canada for the unpaid amounts. This certificate, once registered, has the same effect as a court judgment. The taxpayer is responsible for paying all reasonable costs and charges associated with this registration.
Fines and Imprisonment
Most taxpayers pay their taxes appropriately. When they are unable to do so, most taxpayers contact the CRA and make arrangements for payment, because they understand their obligations and the consequences of failing to meet those obligations. However, in some cases, a taxpayer may deliberately not pay the appropriate taxes. When this happens, the CRA takes much stronger action.
If a business owner is convicted under the terms of the Income Tax Act and/or Air Travellers Security Charge Act for withholding tax and not sending it to the office of the Receiver General for Canada, or for failing to collect, send, or pay GST/HST or net tax, they can be fined $1,000-$25,000 or fined and imprisoned for up to one year. If they are convicted under the Excise Tax Act, taxpayers can be fined $1,000 plus 20% of the GST/HST or the net tax that should have been, depending on the circumstances, collected, paid, or remitted, or they may be fined and imprisoned for up to six months.
What Is the Voluntary Disclosure Program?
The Canada Revenue Agency’s Voluntary Disclosure Program allows a taxpayer who forgot to file a return, neglected to pay their taxes, or made a mistake on their return (such as underreporting their income or claiming ineligible expenses) to voluntarily disclose this information in exchange for relief from some of the penalties and interest, and to avoid potential prosecution. If you are aware of an error on your tax return, or did not file a tax return, Jeremy Scott Law may be able to assist you with applying to the Voluntary Disclosure Program.
To take advantage of this program, business owners would need to complete an application requesting to fix these errors or omissions before the CRA contacts them about the problem. If they are accepted, the taxpayer would still be required to pay the taxes owed, plus at least some of the interest due. However, they may escape prosecution, and they may also be able to avoid the usual penalties and some of the interest. The CRA does provide higher levels of relief to taxpayers who made an unintentional error than to those who deliberately attempted to avoid paying their taxes, even if the latter do come forward voluntarily.
How Far Back Can You Go To File Taxes in Canada?
The Canada Revenue Agency allows taxpayers 10 years from the end of a calendar year to file an income tax return for that year. Someone who did not file and pay their taxes in 2013 would have until the end of 2023 to file and pay.
While taxpayers are encouraged to pay any taxes that have not been filed or paid at the appropriate time, it is important to note that late-filing penalties, interest, and other potential fees will apply, as well as the potential for imprisonment if it is determined that the taxpayer deliberately attempted to avoid paying taxes. Therefore, the sooner a taxpayer can pay those taxes, the better their situation is likely to be.
What Is the Tax Collections Limitation Period?
The CRA has a Tax Collections Limitation Period (CLP). This CLP is the time during which the CRA can attempt to collect a tax debt. The start date and duration of a CLP both depend on the type of tax debt. Once the CLP ends, the CRA cannot take any further action to collect the debt. The debt still exists, and taxpayers are encouraged to make voluntary repayments, but this will not restart the CLP.
The CLP for business payroll debt is six years and begins the day after the notice of an assessment or reassessment is sent. The CLP for business GST/HST debt, individual tax, corporation tax, or large corporation tax is 10 years. For GST/HST debt, the CLP begins the day after a notice of assessment or reassessment is sent. For individual, corporation, or large corporation tax, the CLP begins on the 91st day after the notice of assessment or reassessment has been sent.
Do You Have Other Questions About the Canada Revenue Agency and Its Tax Collection Policies?
Canadian business taxes can be confusing and complicated. From understanding when to collect GST or HST, withholding payroll taxes, or identifying if your business is required to pay carbon tax, there is a lot to remember. The Canada Revenue Agency answers many questions on their website and in their publications, but often business owners may struggle to fully understand the various tax rules that may have a bearing on their situation. If you have questions about the CRA’s tax collection policies, a seasoned Canadian business tax attorney with Jeremy Scott Law may be able to assist you. Call (902) 403-7201 to schedule an appointment and learn more.