In our previous Farm Alert article, we discussed what to consider before incorporation of your farming business. Here, we outline what you will need to consider after incorporation.
Government filings
Shortly after your lawyer files articles of incorporation, the Canada Revenue Agency (CRA) will mail you a letter with your new business number. When you receive this, you must call the CRA to set up new corporate GST/HST and payroll accounts, which will be used for your regular filings moving forward.
Also, if there are any T4 slips to prepare for the old partnership or proprietorship, these must be filed by the end of the month following incorporation – not February of the following year when they are normally due.
Customers and suppliers
After incorporation, you must open a new business bank account in the name of the corporation to use for corporate receipts and expenditures.
You should also contact all your customers and suppliers, including creditors and insurance providers, to ensure payments and invoices are now made out in the name of your company rather than your old proprietorship or partnership. If invoices are not in the company’s name, the CRA may deny deductions and HST input tax credits or include company income as personal income.
Any final accounts receivable and accounts payable related to the previous partnership or proprietorship should be paid and collected through the partnership’s or proprietorship’s bank account – not the company’s bank account – so there is no confusion about which entity any funds are associated with.
Some customers, like quota marketing boards, may require you to complete a special administrative process before they begin issuing payments to your corporation.
Recordkeeping
New bookkeeping records must be set up for your company. Your Baker Tilly advisor can assist with setting up your books and answering bookkeeping questions for your new company, as well as setting up opening account balances. It may also be necessary to maintain the previous proprietorship or partnership bookkeeping records if there is business or rental activity to be kept separate from the company.
Corporate expenses paid personally
Since the corporation is a separate legal entity, it is advisable to not pay for corporate expenses using personal funds. To the extent possible, the corporation should pay for all expenses related to the company.
Given the convenience and reward systems available with most personal credit cards, you may make some corporate purchases with personal funds. You may also want to use other personal assets, such as a personally owned vehicle, for corporate business activity.
If these situations arise, we recommend preparing an expense report and submitting it to the company for full reimbursement. This expense report should be maintained as a permanent record with appropriate receipts attached.
Personal expenses
Unincorporated farms (i.e., partnerships and proprietorships) are often accustomed to paying personal expenses through their business. This cannot be done in a company without personal tax consequences as it is a separate legal entity.
The best practice is for the company to not pay for any personal expenses (like groceries, entertainment, mortgage payments or household items) of shareholders or individuals related to shareholders. If your corporation does make such purchases, separate these in your bookkeeping as a “shareholder loan” so they are easy to identify.
Corporate financial statements and tax returns
The first corporate tax return is due six months after the first year-end. For example, if you chose a June 30 year-end, the first tax return would be due before Dec. 31.
If there are taxes owing in the company, these will normally have to be paid three months after your year-end to avoid interest charges (some larger corporations have a two-month deadline).
Your accountant will give you a detailed list of information they require to complete your year-end before your year-end. Submit this information to your accountant no later than six weeks after your year-end to ensure adequate time to complete work within deadlines.
After the first corporate year-end is complete, if there is tax owing, you must make monthly tax instalments to the CRA for next year’s taxes owing based on the previous year’s taxes payable.
Personal tax returns must also be completed and are due April 30 or June 15 (if there is a business or farming statement) of the following year. Additional time may be needed to prepare personal tax returns in the year of incorporation if there are still a few months of reportable farming income and expenses, capital gains and other transactions associated with the rollover to the company.
Also, financial statements including an income statement and balance sheet must be prepared to complete the corporate tax return. It is possible the previous partnership or proprietorship may not have had financial statements, as they would not have been required for tax purposes. In this case, your accountant may request more information than what you are accustomed to, especially in the first year of preparation.
Conclusion
This article summarizes a few major planning items to consider after incorporating a farm business. We recommend working with your Baker Tilly advisor during this process to ensure the transition after incorporation is as smooth as possible.
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