Are you ready to incorporate your small business?
There’s so much to cover about how to incorporate a business in Canada, that we broke it up into two parts. In Part 1, we covered doing a name search to zero in on an available corporate name, deciding whether to register federally or provincially, the safety and availability of digital minute books, as well as making by-laws to establish and organize your day-to-day operations. Here in Part 2, we’re examining shares and shareholder agreements, annual findings, annual returns, annual general meetings, along with GST/HST and payroll returns.
Shares & Shareholder Agreements
One of your corporation’s first activities following incorporation will be to issue shares. A person becomes a shareholder when a corporation “issues” shares in that person’s name.
But, how do they buy the shares? What’s the price of the shares? Are there redemption amounts and are they redeemable? What are the restrictions on the share classes? How many are “common” shares (owned) versus “preferred” shares (a holding company or a family trust can own to participate in dividends)? There are a hundred different scenarios so how do you know which share structure is right for your situation?
How do you go after investors or a bank loan if your shares are poorly arranged? Investors and banks are ruthless in their checks, before they ever give you a dime. You can have a great business, but if your corporation was set up incorrectly, Venture Capitalists will always say no. Many newly incorporated businesses give stock options to their family and friends first, then try for “Angel” investors, then aim to attract Venture Capitalists.
If your first investors (friends) have all the common A shares, so you can only offer B or C shares or amend your articles to change the limitation (which dilutes the worth), inventors simply won’t want to get involved. Don’t rush decisions on the share structure of your corporation established in its articles.
Organizing the classes and the maximum of shares can become quite involved and requires expert counsel. Expect that no matter what you anticipate now, something else will come up that you never considered before. Your lawyer will maintain the business registers and ledgers, keeping track of who the shareholders are, how many and which class of shares they own, what they paid for them, who they transfer to, and more.
Every year you will be required to file a T2 Corporation Income Tax return to the Canada Revenue Agency (CRA), potentially alongside a provincial annual return for corporations. You must choose a fiscal year-end date within 53 weeks of your incorporation date. The year-end date will be set once the first corporate tax return is filed. Be strategic when you choose your fiscal year-end, ideally have it on the last day of a month when your revenues are at the end of a predictably slow period.
For example, a landscaping company would do well with the end of February as their fiscal year-end. They would pay their taxes three months later when they have cash. Do yourself and your accountant a favour by not making your fiscal year-end on December 31 because everyone does. This makes March an especially busy month because personal income taxes are also being completed at the same time. Want all of your accountant’s attention? Make May 31st your fiscal year-end, because August is their predictably slow month.
What happens if there’s a change of control? If a partnership has ended, the tax year-end of the corporation will move to immediately before the acquisition of control by the remaining partner (who purchased their partner’s shares). Then there is an assumed beginning of a new tax year at the time of the acquisition of the control. This typically results in a short taxation year. The corporation will have to file a tax return for that short year within the normal time frame (6 months after the year-end). It will have to pay the balance of its tax owing for the year within a few months after the year-end.
Every federal corporation has to file an annual return with Corporations Canada every year. within six months after the end of its taxation year. It must be filed within 60 days of the company’s anniversary date. In most cases, your lawyer will file this around the same time your tax return. The return requires you to provide the date of your last annual meeting of shareholders. The directors approve the financial statements and shareholders review them.
Annual General Meeting
Before the annual meeting, your accountant will complete the corporate tax return, figure out if dividends are to be paid and who owns each class of shares. Usually some time after filing the tax return, they will put together a resolution in conjunction with a lawyer, although it really can be anytime. The one exception is for personal corporations, such as a Realtor, who only have one person. Annual general meetings can be very informal, but they do have to happen.
GST/HST & Payroll
When you make more than $30,000 a year in revenue, the Goods and Services Tax (GST)/ Harmonized Sales Tax (HST) your business collects on sales needs to be remitted to the CRA. When you file a GST/HST return, you can claim the GST/HST you pay on services and supplies you need to run your business, as they’re eligible for a credit (‘write-off’ or ‘business expense’) up to a certain limit. Check the Government of Canada’s Input Tax Credit website section to see if you qualify for ITC savings.
If you plan on having employees, you will be required to register for a payroll account with the CRA and remit their Canada Pension Plan (CPP) contributions, Employment Insurance (EI) contributions, and Income Tax on a regular basis – typically bi-weekly or monthly. If you didn’t open an account before hiring employees, you still need to calculate deductions and remit them by the due date. If you don’t, you may be penalized.
Keep in mind that when you register your corporation and receive a business number, you’re not automatically set up with a GST & HST account or a payroll account. Check out Business Registration Online (BRO), a one stop, self-serve application that allows you to register for these accounts.
A Tailored Strategy
An experienced accountant and lawyer can guide and customize your incorporation by tailoring your articles of incorporation, organizing your corporate by-laws, and planning a share structure with multiple classes of shares. They will take charge of your annual tax filings, and make sure you’re remitting GST/HST and getting those write offs.
Set up your corporation correctly at the beginning, get training to get going, and you’ll be pretty self-sufficient going forward. Of course there will always be more situations that pop up that require professional help, so please don’t think you can do everything all on your own. Unfortunately, too many people rush in and go the DIY “simple and fast” pre-packaged incorporation route. They cut out all other stuff because they simply don’t know what they don’t know, as they’re not comparing apples to apples. Although they have a business number and a bank account, it’s not really completely done and legal. Wait times to call the CRA are hours long, so anything you can do online when you can will benefit you. Do you value your own time? An accountant can save you time by guiding your registration of a Canadian-controlled private corporation. There are many more details and strategies that go into the process. Trust.