Why Companies Struggle with Canadian Taxes in the Second Year
Updated: Mar 9, 2020
Many companies struggle with Canadian taxes in the second year and beyond. This is because businesses don’t plan disbursements properly and run out of cash in year 2 due to expenses that accrue in year 1 but don't show up until year 2. Additionally, there are new tax requirements showing up in year 2, 3 and 4 that may not be considered upfront.
A good place to start to get disbursement insights is a 13-week cash flow model. The 13-week cash flow model helps forecast disbursements in cash coming in over the next quarter. This model, down on a rolling 13 week basis, can help you with your liquidity. It's also important to have a good understanding of how taxes work for businesses in Canada. The taxes paid in year 1 is fewer in the number of payments made when compared to year 2 and 3. Here's a breakdown.
Disclaimer: this is not advice, this is an indicative model. Consult an accountant, CRA and your provincial tax authorities.
In the first year, companies potentially pay 3 types of taxes: payroll, PST, and GST.
Payroll taxes are paid the month after payroll is paid. The amount of taxes to remit will vary by province and payroll size. In this case, we assume that the company started their business on January. They paid payroll on January and pay the taxes on February. Taxes are paid monthly.
PST (Provincial Sales Tax) is a retail sales tax that applies when a taxable good or service is purchased. PST only applies to certain provinces and specific items in Canada - make sure to check with your local accountant.
If you are selling PST goods, things that are tangible, then you need to remit the sales tax. Payment is similar to payroll in that it's paid one month after sales are made.
GST (Goods and Services Tax) applies to most goods and services. GST is generally remitted on quarterly basis. In total, there are 25 tax payments to consider in year 1.
The second year is where it gets tricky. For taxes related to payroll and PST on the last month of year 1, they are paid on the first month of year 2. Similarly, GST for months 10, 11, and 12 from year 1 is paid on the first month of year 2.
In Year 2, you will need to pay corporate tax and personal tax. You need to pay corporate tax after the first 12 months of being in business. This payment has to happen anywhere within the first 6 months of year 2. Personal income tax from year 1 needs to be paid by April of year 2.
In total, there are 5 additional tax payments to be made in year 2 when compared to year 1. It's a good idea to have separate accounts for each of these.
In year 3, the tax payments are similar to year 2. In the case of personal income tax, if you've paid $3000 or more for two years in a row, you will have to make installment payments. In this example payments start on the 30th month, which in this case is June in year 3, then on August, December, and March of the following year.
Here's how year 4 looks like. There are a total of 34 payments.
Hopefully this model shows you what you might experience and this better helps you plan your cash flow going forward. If you have any questions about this, please feel free to contact me.