Setting up an Incorporated Music School
Question
"I am working on getting a new incorporated music school started in Victoria. We are starting some lessons next week, but the real opening of the school is January. In the mean time we have some questions about things relating to bookkeeping, legal stuff, and otherwise. I figure you can point us in the right direction. Here are some of our burning questions:
- Do we charge GST on private music lessons? Group music lessons?
- How do we handle contracting vs employing our teachers? We need advice in writing their contracts so we don't get in trouble from Revenue Canada down the road.
- How do we register for GST?
- Can you advise us on how to set up our books, what programs to use, etc.?"
Answer
Your corporation must file a T2 Corporate Tax Return each year.
Do we charge GST on private music lessons?
No. Music lessons are GST exempt. You also can't claim input tax credits and recover the GST paid out on your purchases.
Group music lessons?
Same answer as above.
How do we handle contracting vs employing our teachers?
You will probably want to engage your teachers as subcontracts or self-employed contractors, both of which mean the same thing, that they are not employees. If they are employees, the school will be required to make payments to EI and CPP on their behalf, and I imagine that you won't want that additional expense. If they are self-employed they pay their own CPP and don't pay into EI, and you would issue them T4A slips at the end of each year reporting their earnings for the year.
All the other music schools in Victoria, with the exception of the university, engage their teachers as subcontracts, so your teachers will probably expect that to happen.
We need advice in writing their contracts so we don't get in trouble from Revenue Canada down the road.
It's a common misconception that minor language choices in a contract will determine employment or self-employment status. Canada Revenue Agency actually looks at four different indicators: control, tools and equipment, chance of profit/risk of loss, and integration. Visit the following website if interested in reading more about it:
Employee or Self-employed?
http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110ed.html
I personally think that there is very little chance that your teachers would be considered employees. It can't hurt though to borrow some boiler-plate language from other arts organizations in the area.
How do we register for GST?
Registering (opening) Your GST/HST Account
http://www.cra-arc.gc.ca/tax/business/topics/gst/corporation/registering/menu-e.html
You have to register if revenue, not including music lessons, exceeds $30,000. But you probably won't have any other types of revenue, at least in the beginning, so I wouldn't worry about it for now.
Instead, you need to take care of the various legalities of setting up a corporation:
- Visiting a lawyer and having the articles of incorporation drawn up;
- Choosing the directors, issuing shares to the shareholders, deciding on location of books and records;
- Registering the business name;
- Opening a bank account in the business name;
- Getting a business number from Canada Revenue Agency; and
- Doing the other stuff I can't think of right now.
Your lawyer can help with #1 & #2.
You do #3 at the corporate registry downtown, beside the Main Branch of the public library. I think most banks now require you to take care of #3 before you can do #4.
You do #5 by filing with Canada Revenue Agency the following form:
RC1 - Request for a BN
http://www.cra-arc.gc.ca/E/pbg/tf/rc1/README.html
Can you advise us on how to set up our books/programs to use/etc.
Well let's see...
You need a database program to keep track of your students.
You need a spreadsheet program to keep track of the instructors hours taught and calculate their pay.
You need a good word processing program, one that can mail merge with your database and spreadsheet for printing letters, invoices, teacher pay statements, envelopes and labels, etc.
You need Microsoft Office! It really is the best software for what you are going to do.
You might be able to get by in the very beginning with something like Microsoft Works or Open Office, but I bet in a while you will wish you had started out with Microsoft Office.
If you decide to take care of the bookkeeping on site, you will need an accounting program such as Quickbooks, Simply Accounting, or even just Quicken Home and Business. If you hire somebody like me to do the monthly bookkeeping and payroll, that person will probably have their own software and you won't need to worry about it.