Setting up a new corporation has many benefits but can also be complicated. Here are 7 steps you need to take to simplify this process.
1. Open a bank account:
A corporation is a separate legal entity. When you conduct business in your corporation’s name, the corporation earns money, not you personally.
If you receive money in your personal bank accounts, shareholder benefits might have been conferred to you instead.
In simple terms, you will have to pay personal taxes in your name.
And your corporation may still have to pay taxes on this earned income!
Double the taxes!
The best way to go around this is to ensure all corporate income earned is deposited directly into the bank account.
2. Open a credit card, if that’s an option:
When you first set up a corporation, it’s often advisable to have a credit card as well.
Credit cards are used for the day to day business expense incurred to earn the income.
Sometimes, the bank may not allow a brand-new corporation to have its own credit card.
A dedicated credit card in your name can be sufficient.
The idea is that only corporate business expenses can go through this credit card, making accounting, bookkeeping and reconciliation a lot easier.
It also helps to establish the deductibility of fees and interest on this credit card.
3. Purchase shares:
Many business owners simply go online to set up the corporation themselves.
Shares are often set up as a journal entry at year-end by the accountant.
The truth is, to have the corporation established, a share must be purchased. (Trust me, a few court cases have mentioned the validity of the corporation before!)
To establish that, the shareholder should deposit a cheque to subscribe for the shares at the beginning.
4. Register for your HST account
You may be in the residential rental business – most residential rental companies are not subject to HST, and you may not be required to register for HST.
If you are a builder building new homes, your business is subject to HST. Registering for HST earlier guarantees that you get the benefits of getting a refund from the HST you paid.
If you are a flipper, depending on whether you are renovating substantially or not, you may have an HST exposure still.
If you are a real estate brokerage, you don’t really have a choice but to register for HST. Chances are, you won’t even get paid if you are not registered for HST.
If you have HST exposure, be sure to register for an HST account early to avoid any future surprise.
5. Select an accounting software and all related apps:
Whether you have a real estate investment business, realtor business, flipping houses or building houses, you would need to select an accounting software initially.
Or alternatively hire a company for your accounting needs, from payroll to making sure there are never any errors on your bank statements.
In the marketplace, there are tons of apps that keep everything smooth and straightforward for you.
For example, if you’re handling many customers then it is important to get a powerful CMS system that suits your needs. Two of the main ones to compare when making this choice is freshdesk vs zendesk, as they are major players in the market and each can help with certain niches.
Apps for real estate professionals:
General contractors – specific apps are available for progress billings.
Regular business owners – I suggest using credit card collection, which makes collection much more manageable.
Rental investors – I’m personally using an app for collecting rent and making payments to my subcontractors at $1 each. The app syncs with my accounting software, performing my accounts payable, and receivable function automatically and seamlessly.
I looked into this app after a friend of mine recommended that I look into a way to manage my rent collection and my accounts. She stated that she used a Xero accountant, a financial advisor who was adept at using the Xero accounting system, which is a cloud-based account software for small businesses.
There are also apps out there helping you to track your mileage and fetching bills and bank statements for you.
It would be advisable to also get yourself some documentation management software, this will help you get everything on your computer organised and anything that you have as a physical copy can be scanned into it too, this will reduce paper in your organisation.
Look at software on FilecenterDMS.com to see how it can help you.
Be sure to speak to your accountant regarding the apps available that suit your specific need.
6. Select a year-end for your corporation
As an individual, we’re so accustomed to having December 31 as a year-end. Calendar year-end means our year-end.
We are required to file our personal tax return on April 30 if you’re not self-employed or by June 15 if you’re self-employed.
One year-end is December 31, which is one filing deadline.
Your corporation is a separate legal entity. Your corporation has the flexibility to select its year-end. And it does not have to be December 31!
Sometimes, a year-end of January 1 can be advisable for tax deferral purposes. Sometimes, a July 31 year-end may be more appropriate.
The filing deadline for a Canadian Controlled Private Corporation (for the majority of my audience here) is six months after year-end. Corporate taxes, however, are due only three months after year-end.
HST filing requirements can be different, depending on the filing frequency requirement.
7. Make money and talk to your accountant early
After spending so much money on the initial setup, it’s time to make some money!
Tax planning should be accomplished ahead of time and it is also highly personal.
The strategy should start before setting up the corporation, with your goal in mind, the proper corporate structure should be set up.
Once you start earning income, you should have a conversation with your accountant on how much money you should set aside in preparation for tax owing.
Believe it or not, making money is essential, but keeping a portion for the taxman can avoid much grief in the long run.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant