Taxes can be confusing when it comes to separating your personal income from your business income. When your business is incorporated, it becomes an entity itself, capable of being taxed, sued, and all other things that can be done to an individual. Do you still have to file a personal return, even though your corporation’s income is already taxed?
The short answer is: yes. In Canada, filing a tax return on income from your corporation does not excuse you from filing a tax return on your personal income. Of course, there are many caveats to this simple rule.
First, the type of corporation you run determines the type of return you must file. If you are a non-profit corporation, organized for charitable purposes, your corporation is not subject to the same tax consequences as a for-profit business, although your personal tax liability may be the same. Further, your tax consequences will be different if you are organized as a private corporation or a public corporation. In Canada, a Canadian-controlled private corporation enjoys a significantly larger tax advantage than foreign-owned corporations. Be sure to talk to your accountant about possible tax advantages from types of incorporation when you file your corporate papers.
Further, the area in which you do business will affect your tax liability and initial start-up costs. If you are doing business only in Montreal as a sole proprietorship, it makes sense to incorporate provincially, which is less expensive. However, if you are doing business in other provinces and Montreal is only your home base, then you should consider federal incorporation.
Another consideration when filing your taxes is your corporate structure. Your corporation’s income may or may not be tied to your personal income, depending on how you pay yourself. If you are an employee of the company, your salary will be taxed under your personal income tax, and the corporation’s income will be taxed under the corporate return. It pays to discuss with an accountant the options you have for financial setup when you incorporate. You can save significant money by paying yourself in certain ways.
However your corporation is set up, you should always file your personal income on a T1 return and your corporate income on a T2 return.