Did you know that the franchising industry in Canada makes up the 12th largest sector of our economy? According to the Canadian Franchise Association (CFA), franchising contributes over $100 Billion CAD annually to our economy, creating close to two million jobs for Canadians. That’s a lot of loonies and toonies to keep track of!
Because tax season is descending upon us, it’s important for franchisees to know exactly what sort of tax and financial reporting is required by Canada’s Revenue Agency (CRA). In this blog edition, we’ll cover the reporting you’ll need to know for both.
Tax Reporting – as your aware, Canada employs a multi-layered system of taxes, consisting of corporate, GST/HST, and payroll taxes:
Corporate Taxation
As a franchisee operating as a corporation, you’re required to file an annual tax return in Canada, which includes both provincial and federal calculations. Your corporation’s taxable income is charged to the corporation, while salaries and dividends to owners are charged to the owner’s personal account.
GST/HST
GST/HST is a federally imposed value-added tax that applies to many services and property (including real, tangible, and intangible property). Franchisees that are GST/HST registrants are typically required to collect GST/HST on supplies that are made in Canada, and the tax the franchisee collects must be remitted to the CRA. Registrants that incur GST/HST on purchases may be eligible to claim input tax credits, i.e., refunds of the tax paid. Therefore, where some other taxes are an expense, GST/HST is generally cash neutral at the commercial level.
Payroll Taxes
Franchise owners are responsible for the payroll taxes of their employees, in the manner of remitting this portion to the CRA. Corporations have to register, make regular periodic payments, and settle total income with deductions each calendar year.
Financial Reporting Requirements—when certain financial statements are required, the following list of reporting examples is below:
Notice to Reader (NTR)
In an NTR engagement, an accountant will compile the financial statements from your bookkeeping records. The accountant is responsible for ensuring that the financial information is mathematically correct but gives no assurance that the information provided is accurate.
Review Engagement
A review engagement is a report where the accountant will perform procedures including inquiry and analytical procedures, to provide limited assurance that the financial statements are prepared according to a financial reporting framework.
Audit Engagement
The highest level of assurance is an audit engagement. The auditor will provide an opinion as to whether the financial information in the financial statement is prepared, in all material respects, in accordance with a specific accounting framework.
Utilizing the franchising route to becoming your own boss can be an exciting and powerful feeling, but it doesn’t make you exempt from your responsibilities to follow all guidelines, taxation and reporting requirements designated by the CRA. It’s advisable to engage the services of a professional certified public accountant to oversee your books and manage your tax and reporting responsibilities accordingly.