So you’re ready to start your business but you’ve received mixed messages about tax implications for Aboriginal entrepreneurs. Does it depend on whether you are status First Nations? Is it about the business structure you choose or whether you operate on- or off-reserve? Or all of the above? Have no fear, you’re not alone! There is no right or wrong choice but it is important to understand the impact of each option and which will work best for you before setting up shop.
Aboriginal entrepreneurs consistently leverage knowledge, creativity, and work ethic to create successful ventures in Alberta. If you’re looking to follow in their footsteps, it’s important to understand that tax rules differ for Aboriginal-owned businesses that operate on- and off-reserve.
We asked tax expert Bettina Pierre-Gilles, with Phasis Consulting, to share her knowledge about business tax and startup strategies for Aboriginal-owned businesses in Alberta. Bettina is a senior finance executive with nearly 20 years of experience.
Am I exempt from paying tax?
It can be advisable to start as a sole proprietor if you’re a First Nations person with status, and you live and do business on-reserve. With this structure, there is no distinction between you as an individual and your business. Section 87 of the Indian Act states that you aren’t taxed on the income you make through your business activities on-reserve, nor do you pay GST on purchases made on-reserve. Provided that all of your revenue comes from on-reserve customers, you don’t need to remit GST, either.
If I run a sole proprietor business off-reserve, am I exempt from paying tax?
Usually, income earned off-reserve is taxable, even if you live on reserve. However, if your business has social benefits to people on reserve, you may be entitled to an exemption.
What are the tax implications of incorporating my business?
Incorporating your business means you let go of any GST exemptions you had as an individual, regardless of whether you operate on- or off-reserve. Canada Revenue Agency (CRA) only recognizes the tax exemptions of status First Nations people, not their corporations. That said, it might be more advantageous to pay the regular business taxes — it really depends on the nature of your business idea and the scale you’re working on (for instance, the size of your potential customer base and market).
For example, if you want to start a construction company and you have an opportunity to contract your services out to build a new recreation centre, it might be best to incorporate at the start in order to meet certain insurance or regulatory requirements. As well, incorporation can give you more credibility with lenders, easing the process of gaining capital for your business.
What are the tax implications of hiring staff on-reserve?
If you have incorporated your business, but your employees are First Nations people working on reserve, you won’t have to remit certain payroll deductions to the government. Businesses can use CRA’s TD1 form to see if their employees are exempt from payroll deductions.
Am I tax-exempt if I run an online business as an Aboriginal entrepreneur?
If your business is run on-reserve (whether from your home or a formal office), you won’t pay income tax as a sole proprietor. However, if you provide products or services to customers off-reserve, you will need to remit GST for annual revenues over $30,000.
Are grants for Aboriginal entrepreneurs tax-exempt?
There are quite a few grants available to Aboriginal people starting businesses and you may be eligible for some of them. Remember that grants are considered income by Canada Revenue Agency, therefore they must be declared and taxed accordingly. It is important to know that tax implications can vary so make sure you consult an accounting professional.
If, for example, you receive a grant for spurring economic development so you can hire two youths from your reserve to work for your business, you still have to report that grant as income and pay tax on it. However, you can also claim a wage expense against it, therefore decreasing what you pay in taxes.
What are small business deductions?
Small business deductions are business-related expenses that you can claim against the revenue earned to reduce the taxes you pay (whether you’re a sole proprietor or corporation).
Any business owner can reduce their tax paid by claiming deductions, including travel costs, meals with clients, and advertising fees. You can also claim the costs related to your home office space, including a portion of the utilities. Keeping track of all of your expenses from the beginning will help to avoid headaches come tax time.
Have specific Aboriginal tax questions? Get answers in our free Aboriginal Tax Tips webinar airing tomorrow, March 16! Feel free to also give us a call at 1-800-272-9675 if you have any general small business questions. We're here to help.