Managing your taxes as an entrepreneur can be intimidating. The rules and instructions are often complex. And if you don’t pay your taxes properly, you can end up facing penalties.
One reason taxes can seem so complex is because the rules vary by province. But once you learn the rules that apply to you and your business, you’ll see it’s not as complicated as it seems.
To help take some of the confusion out of paying your taxes, here’s what you need to know about Ontario tax rates. This guide will look at sales tax, corporate tax, and personal income tax information for entrepreneurs in Ontario.
Sales tax in Ontario
Ontario uses the Harmonized Sales Tax (HST). The HST was introduced in 2010, and it combined the federal goods and services tax (GST) retail sales tax (RST).
As a result, there’s just one Ontario sales tax rate you have to collect and pay. The HST rate is 13%.
Does your business need to collect HST?
You need to collect the HST if:
- You are not a small supplier.
- You make taxable sales.
Small suppliers are businesses that do not earn more than $30,000 within a one year period. If you are near the threshold, you should read the rules for when you should register to collect HST. You may be required to register within a month of when you exceeded $30,000 in income.
Most goods and services are subject to the HST, but there are exceptions. To help you find out if your business makes taxable sales, here are some examples of what’s exempt.
Tax-exempt goods and services
- Sale of existing housing
- Long-term rentals of residential accommodation (over one month)
- Health services
- Child care services
- Legal aid
- Many educational services
- Music lessons
In addition to tax-exempt goods and services, there are also some supplies that are “zero-rated,” meaning the Ontario tax rate is 0%. You don’t need to charge HST on these supplies, but you may be able to claim tax credits related to these sales.
- Basic groceries (milk, bread, vegetables)
- Agricultural products (grain, raw wool)
- Feminine hygiene products
- Farm livestock
- Fishery products
- Prescriptions and drug-dispensing services
- Certain medical devices (such as hearing aids and artificial teeth)
Register to collect HST
If your business sells taxable goods and is over the $30,000 small supplier limit, then you need to register to collect HST. You can register online, by mail, or by calling 1-800-959-5525.
You’ll just need to have some basic information ready such as a description of the business, the social insurance numbers of all the owners, and the annual revenue (or a reasonable estimate if it’s a new business).
HST is handled by the CRA. So to pay your HST, you need to file a GST/HST return with the CRA. There are a number of methods for doing that, including the GST/HST NETFILE online service or using the My Business Account online portal on the CRA website.
For more help, check out this guide for filing your first GST/HST return.
Out of province sales
You will need to charge a different sales tax rate if you sell to customers in different provinces. Typically will need to charge the applicable provincial tax rates for the province or territory in which the product is supplied to the customer.
For more details, take a look at Canada’s Place of Supply rules.
Ontario corporate tax rates
If your business is a corporation rather than a sole proprietorship, you’ll need to pay corporate tax. And there are two corporate tax rates you’ll need to know.
The Ontario tax rate for corporations is 11.5%. However, the Ontario Small Business Deduction (SBD) reduces that rate for the first $500,000 of income. The lower rate is currently 3.2%.
In addition, there’s a manufacturing and processing tax credit that lowers the Ontario corporate tax rate to 10%. Businesses can qualify for that credit if they are involved in manufacturing, processing, fishing, farming, mining, or logging.
Example tax calculation
For example, a corporation that made $650,000 in 2020 would pay the following corporate tax.
$500,000 taxed at 3.2% = $16,000
$150,000 taxed at 11.5% = $17,250
Ontario corporate tax credits
There are a number of tax credits for businesses in Ontario. These credits can help businesses lower costs, hire and train workers, and be more competitive. Here are some of the Ontario corporate tax credits you should know about.
- Book publishing
- Computer animation and special effects
- Film and television
- Production services
- Sound recording
- Research and innovation
- Community food program donation for farmers
- Training: Employers who hire and train workers for certain skilled trades or get involved with a post-secondary co-operative education program may be eligible.
- Interactive digital media: Businesses can be eligible if they make products such as video games, simulators, and educational software.
Personal income tax in Ontario
Personal income tax can be a little more complex than corporate tax because there are five different Ontario tax rates that govern what you pay. The income you earn up to a specific threshold gets taxed at one rate, and income above that threshold gets taxed at a higher rate.
Keep in mind that if your business is a sole proprietorship, your business income is considered part of your personal income and is taxed the same way.
Ontario tax brackets for 2020
Here are the personal income tax brackets for Ontario in 2020:
|Taxable Income – 2020 Brackets
|$0 to $44,740
|over $44,740 up to $89,482
|over $89,482 up to $150,000
|over $150,000 up to $220,000
Example income tax calculation
An individual or sole proprietorship that earns $80,000 would pay the following Ontario tax rates:
The first $44,740 taxed at 5.05% = $2,259.37
The remaining $35,260 taxed at 9.15% = $3,226.29
Deductions for entrepreneurs
Don’t forget that if you’re an entrepreneur, there are probably many expenses you can claim as deductions. These deductions can be used to reduce your taxable income, which can lower the Ontario tax rates you pay.
Some of the things you can deduct include:
- Home office expenses
- Vehicle expenses
- Employee wages
- Contract labour
- Meals and Entertainment
But remember, to be deductible, these expenses need to be related to generating business. In addition, for expenses like your vehicle or home, you can typically only deduct a portion of the expenses. For example, if you use your car for both work and personal use, you’ll likely only be able to deduct half of your vehicle expenses.
Income tax credits and benefits
There are many tax credits and benefits you can claim to reduce the taxes you pay. There are two types of tax credits: non-refundable and refundable. Non-refundable tax credits can be used to reduce the amount of taxes you owe, but any excess credits are not given to you. Refundable tax credits can be available even when you don’t owe tax. Here are some examples of each.
Non-refundable tax credits
Low-income Individuals and Families Tax Credit — This credit can help low-income workers get tax relief. To be eligible, your individual income must be below $38,500, or your net family income must be below $68,500.
Community Food Program Donation Tax Credit — This credit is for individuals or businesses that donate agricultural products to an eligible food program. It can be claimed in addition to the charitable donation tax credit.
Refundable tax credits
Ontario Child Benefit — This benefit is for low to moderate-income families and is aimed at helping with the costs of raising children. It can provide up to $1,434 per child per year.
Ontario Trillium Benefit — This benefit combines three different tax credits that can help you pay for energy costs as well as sales and property tax.
Ontario Sales Tax Credit — This credit can help with the sales tax you pay. You can receive up to $313 and an additional $313 for your spouse or partner and each dependent child.
Ontario Energy and Property Tax Credit — This credit can help you with property tax and the sales tax on energy costs. You may be eligible if you pay property tax, lived on a reserve, or lived in a public long-term care home.
Northern Ontario Energy Credit — This credit can help with paying the higher energy costs if you live in Northern Ontario, including Algoma, Cochrane, Kenora, Manitoulin, Nipissing, Parry Sound, Rainy River, Sudbury, Thunder Bay, Timiskaming.
There are tax credit calculators that make it simple to help you find out which Ontario tax credits you may be eligible for.
When to pay your taxes
If you still have a debt owing for the 2019 tax year, the deadline to pay is September 30, 2020. For your 2020 taxes, you’ll need to file your return by April 30, 2021.
If you register for a CRA online account, it can make it easier to manage your taxes and deadlines. It will let you manage your tax information, see the amounts you owe, and make payments quickly and easily.
Now you should have a better understanding of Ontario tax rates and how to pay them. You should be able to figure out which taxes and credits apply to your business, and how to avoid any penalties.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.