Tax Tidbits for Small Business Owners: Hiring Credit, NAICS Code and EI Contributions for Corporate Owners

It can be difficult for small business owners to keep on top of the myriad of tax rules, interpretations and changes.  Whether you depend on your accountant or take a more active role in the administration of your business, being aware of the rules can help save you money, time and the displeasure of the revenue agencies.  Below are some tax issues that have come up recently for my clients.

Hiring Credit

Some small business owners, who have employees on their payroll, are receiving a notice from Revenue Canada advising them that are entitled to a credit, which can be used to reduce further remittances.  This relates to the “hiring credit”, which is a credit introduced for the 2011 calendar year and extended to 2012, that incentivized small businesses to hire more employees.  The credit is a simple calculation based on excess of EI contributions for the current year over the previous year.  The best part is that no paperwork needs to be submitted – the CRA will process it and apply it to your account.

NAICS (Business Classification)

When preparing your tax return, all small business owners have to select a North American Industry Classification System Code (NAICS) that most accurately describes their main revenue generating activity.  The code is available as a dropdown in most tax preparation software.  While the NAICS database is regularly updated, finding an exact match can sometimes be difficult.  The free NAICS code lookup available at NAICS can help facilitate the process.  It can also sometimes be helpful to Google the type of business that you have along with “NAICS” to determine what other businesses in your industry use, as they will often publish this info.  Note that Revenue Canada needs this information to compile more accurate statistics and provide a basis for comparison for other businesses in the same industry.

EI Contributions for Shareholder/Employees

When an employee of a corporation owns more than 40% of a corporation, they are actually exempt from Employment Insurance (EI contributions) .  This may also apply to family members who are individuals connected by blood relationship, marriage or common-law partnership or adoption, unless they are employed under substantially the same terms as non related persons.  When completing the payroll for the shareholder-employee of the corporation, you would indicate that they are EI Exempt as long as they own more than 40% of the corporation.  For those for whom this is a revelation and have contributed EI premiums in years past, you can actually apply for a refund of an overpayment by issuing amended T4 slips and filling up form PD24 for the years in which the overpayment occurred.  Note that you are only allowed to claim up to 4 years of refunds.

Ronika Khanna is an Accountant in Montreal that provides tax and accounting guidance to small businesses and self employed individuals.  Please sign up to receive articles pertaining to small business, accounting, tax and other occasional non business topics of interest.  You can also follow her on Facebook or Twitter and Google Plus