A corporate tax, also known as corporation tax or business tax, is an indirect tax imposed on companies or comparable legal entities by a province. Many countries levy this tax at both the federal level and at the local level. Typically, it is derived from the profits made by the company in a specified year. There are two basic types of corporate tax. They are regressive and proportional.
In a regressive tax system, a corporation tax is based on the amount of income a corporation receives and then forgets to pay it on its yearly profits statement. This leaves a gap and makes it difficult for a small business to successfully compete with larger firms in the same field. Calculating corporation tax is quite difficult, since there are so many factors to consider. For instance, dividends paid to shareholders are not included in computing income, nor are capital gains and some other kinds of income. In addition, small businesses often have only one owner, making it impossible to calculate income tax by the owner’s alone.
In a proportional tax system, a corporation pays a regressive income tax rate that increases as the corporation grows. The most common form of proportional taxation in Canada is the profits and loss account method. For instance, if a corporation has one million dollars in assets and earns two million dollars in profits in a year, it would pay an income tax of ten thousand dollars. If the same company earned twelve million dollars in profits the following year, it would owe an income tax of thirty thousand dollars.
There are also situations where a corporation may have both a progressive and proportional taxation system. Usually, a progressive tax system gives tax credits to the bigger companies and decreases tax rates for smaller ones. Corporations can invest in an RRSP, or a registered retirement savings plan, in order to take advantage of this system. After all, the larger the amount of profits of a corporation earns, the larger its tax bill will be. If you can, you should consult a financial advisor who can help you determine which tax rates apply to your situation and how much of your profits can be invested and/or deducted.
One of the best ways to avoid paying income tax is to keep accurate accounting records. Every business must have bookkeeping records to ensure that everything reported on a company’s income tax return is correct. Corporations can save a lot of money by keeping accurate records because they won’t have to pay any penalties for errors made on their tax return. The first thing that any corporation needs to do is create a bookkeeping system and keep accurate accounting records. It is vital that all of the corporation’s shareholders be informed about the company’s management policies and procedures.
The next deadline that comes with what is corporation tax is April 1st, the start of the taxable year. Most companies issue a tax return that same day and issue a refund cheque the same day. However, if the company does not receive its tax return on time, then it is required to file a post-dated tax return, commonly known as a quarterly return. This means that the company must file the return with the appropriate tax payer (usually the government).
A company must also submit its tax return to the CRA (Internal Revenue Service) on or before April 1st of the following year. In addition to the tax due date, the company must also submit payment receipts if it received anything from the government. If the company fails to remit its tax on the applicable deadline, then it has to repay the amount to the government and forfeit its tax-free compensation.
Lastly, on April 1st of every year, the accounting year ends and the corporation must file its financial statements. These statements provide the information needed by the government and accounting firms to determine the year’s profits and losses. Once these statements are filed, the accounting year is over and all income for that year is taxable under the provisions of the Corporation Income Tax. If a corporation did not earn any profit or did not incur any losses in a certain year, then it is not taxable. Corporations must only pay taxes if they actually earned profits and incurred losses. For this reason, most small businesses choose to pay their taxes on a yearly basis.
danstheman
Dan Lewis is a business and finance consultant who stared is career with Capital One and worked as a business and finance analyst for over 25 before leaving the corporate world to create this blog.