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Obligations From Tax Delay for Different Business Structures: Know It Now

Being late in tax filing as a business owner may sound like an ordinary matter. However, when a person realizes its eventualities, he wants to avoid it at all costs. It is a compounding failure. Its implications continue to grow with each passing day until the business owner finds himself stuck in a complex maze of administrative red tape. 

What are different business structures, and what obligations arise from a business' late filing of taxes? 

Sole Proprietorship
A sole proprietorship is the simplest business model in which a single owner owns the Business. The Business is not separate from the owner. The proprietorship runs under the owner’s name or can also have its name. 
  • Tax and late filing obligations of a Sole Proprietorship 
The Canadian Revenue Agency (CRA) treats such a business as an individual for tax payment purposes. 
The following are notable points in this regard: 
  • A sole proprietorship pays taxes if he is an employed individual. 
  • It gets a 50% discount on capital gains tax.  
  • However, it must pay a GST over $75,000.  
  • Moreover, it can’t share tax liability for profits and losses with family members.  
What other obligations can be there:
  • Payment of interests 
  • Contact the revenue agency to devise a payment plan.  
  • Making good record-keeping and tax management.  
In case of late filing
  • For failure to file payment remittance: 10% for first failure and 20% for second failure, is the penalty.  
  • The late filing penalty is 5% plus 1% per month, for a maximum of 12 months. It almost doubles after 3 years of late filing.  
  • For late filing of GST and HST, penalty is calculated using following formula:

A+(B*C) 

A= 1% of tax owed 

B= 25% of A 

C= Number of months of delay 

Partnership
  • What is a partnership?
A partnership is a business in which two or more people come together by an agreement that distributes shares and responsibilities among them and stipulates other details. 
The partners themselves have the liability in this Business. 
What are the tax filing and late filing obligations of a partnership?
The following are the noteworthy provisions in this regard: 
  • The CRA collects tax from the partners in proportion to their share in the Business.  
  • A partnership gets a 50% waiver on Capital Gains Tax.  
  • It must pay a GST above $75000 of yearly income.
Obligations of a partnership in Case of being Late on Tax
Tax Obligations of a Partnership in Case of Late Filing
  • A partnership incurs a penalty of $25 a day, with a cap of $2500.  
  • At the same time, if the revenue agency requests a document and the partnership fails to submit it in time, another $25 per day is payable, with a cap of $2500.
Corporation
A corporation is an entity where many individuals, stakeholders and shareholders come together to do Business and earn profit. Unlike a partnership, it is distinct from its owners. 
Moreover, it is not a pass-through business, which means its owners do not have personal liability, and the company acts as a shield. 
Obligations of a partnership in Case of being Late on Tax
  • The people behind the Corporation are not liable. 
  • On the other hand, the Corporation itself is liable for payment of taxes.  
  • Beneficially, the Tax rate for a corporation is lower than the personal tax. 
  • Similarly, there is protection for corporations against double taxation.  
  • On the other hand, a corporation must pay a GST above $75000 in yearly income.  
  • Moreover, it must pay a withholding income tax on employees’ wages.  
  • Finally, tax paid on dividends is refundable.
Obligations and complexities arising out of a delayed payment of taxes: 
  • Firstly, if a corporation does not have taxable income in the year, it does not need to pay taxes.  
  • Even then, it should file the returns.  
  • Then, the CRA sends a notice.  
  • If a response does not come, the CRA will undertake an arbitrary assessment.  
  • Unfortunately, arbitrarily assessed tax can be much higher than it usually could be.  
  • For failure to file payment remittance:  
  • Resultantly, the actions CRA then takes can lead to multiple complexities, as discussed below:  
The power of the CRA to impose severe penalties: 
  • The CRA has specific refunds payable to a corporation in its possession. These are the amounts owed to Refundable Dividend Tax on Hand, “RDTOH.” To illustrate, it is the double tax paid on a dividend refundable to a corporation.  
  • On the one hand, shareholders think late tax payments have no consequences. On the other hand, the CRA refuses to refund the Corporation, which can have different consequences.  
  • Similarly, after prolonged late payment (3 years), the CRA doubles the late payment penalties.  
In case of failure: 
The CRA can garnish the Corporation’s bank account to recover the dues. 
Hence, the agency’s power under Article 164(1) of the Canadian Income Tax Act can have broad consequences for a corporation. 
Tax Obligations of a Large Corporation and Consequences of Late Tax Payment
  • A large corporation is just like an ordinary corporation defined above. The only difference is its taxable capital above $10 million.  
  • Like a corporation, it has no personal liability.  
  • Obligations for late filing:  

Such a corporation can face broad consequences in the case of late filing which can include:  

The total penalty payable by a large corporation is a sum of the following two parameters:

0.0005% of its total taxable capital in Canada + 0.25% of tax payable
The penalty applies each month for a maximum of 40 months. 
Trusts: Tax Obligations Arising out of Late Filing
To begin– a trust is an informal entity that arises from transferring property from one person to another for caretaking and benefiting certain people (called beneficiaries). 

1: Trust and Late Taxes: 

Following are notable points in this regard:

  • Firstly, a trust can bring many tax benefits. 
  • However, after 2016, it is liable for the highest marginal tax bracket.  
  • Nevertheless, if the income goes to multiple hands, it saves tax.  
  • Finally, a trust can be eligible for the lifetime capital gains exemption (LCGE).  
  • According to the Income Tax Act, any trust that fails to file its T3 (annual income) returns, and does so knowingly or due to gross negligence, it must pay $2500 and 5% of the highest value of the trust property.  
  • Other assets or companies a trust owns will also see tax liability in their manner.  
S Corporations
  • It is a combination of Corporation and partnership.  
  • Unlike a corporation, it is a pass-through entity.  
  • However, it does have liability protection.  
  • Regarding tax filing and late filing, the CRA allows S Corporations to choose the mode of Business according to which they should charge tax from this entity.  
  • Lastly, if one can traverse the complexities, S Corporations give many benefits.  
Self-employed: Late filing liability 
  • Personal liability. 
  • Requirement to submit GST/HST returns.  
  • Penalty starts at 3% and ends at 20%. 
  • For failure to file payment remittance: 10% for first failure and 20% for second failure, is the penalty.  
  • Moreover, for failure to file GST and HST, 1% of tax owed is added to its 25% multiplied by number of months of delay.
Can I pay my business tax in installments? 
Yes, you can

Four installments are possible: March 15, June 15, September 15, and December 15 each year. 

For a corporation, it depends on its calendar. 
Consequence of Tax Fraud and Evasion: 
  • Jail time (not very common) 
  • 200% of tax evaded 
Can I get a Waiver on penalties? 
You may apply for a waiver for circumstances beyond your control.
However, according to the CRA, they try to process your application within 80 days. But, it has been
eight months due to backlog. 
What benefits can the CRA withhold in case of late payment? 
  • The withheld credits can include:  
  • Goods and Services Tax Credit 
  • Harmonized sales tax (GST/HST) credit 

For pass-through businesses:  

  • The Canada Child Benefit (CCB) and Old Age Security (OAS)  
  • Guaranteed income supplement 
When does the CRA charge interest for installment late payments?
The CRA applies late payment interests only when your installment interest charges for the previous year are more than $1000. 
My Business is late on Tax filing. What should I do? 
Here is a to-do list for you: 
  • Contact the CRA to arrange a payment plan. 
  • File a request for adjustment: a Form T3-ADJ, ”T3 Adjustment Request.” 
  • Request to Extend the Time to File a Return, under provision T1135. 
  • See if the government is inviting any Voluntary Disclosures. It can save you a lot of money and effort.  
  • Late filing penalties are Not tax deductible. 
  • If you are late by several years, file for the earlier year first. It might entitle to carry-forward some amounts for: Books, Capital Losses, Donations and Gifts etc.   
  • Clear your taxes.  
  • File return on time even if unable to pay in full. It will protect you from penalties.  
  • Store your tax records for around Six years.  
Bottomline: 
Being late on taxes is an undue distraction and a significant obstacle to smooth business progression. Make sure you manage your bookkeeping and tax filing so that you can channel your energies to your Business. 

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Online Accountant, LLP is a registered accounting partnership under the laws of the province of Alberta. Online Accountant, LLP is certified by the Chartered Professional Accountants of Alberta.

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17510 107 Ave NW Unit 201, Edmonton
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