Taxation for Small Business

Small business owners in Canada must report business income annually to the Canada Revenue Agency (CRA). The business structure will dictate when the tax return is submitted, and which tax form is used. Owners of sole proprietorships and partnerships use a T1 personal income tax return to report business earnings along with any other personal income because an unincorporated business and its owners are considered one entity. Unincorporated businesses have until June 15 to file but if there is a balance owing, funds must be paid by April 30 as the CRA begins charging daily compound interest on any unpaid amounts beginning May 3. Incorporated businesses are considered separate legal entities and report revenues on a T2 corporate income tax return. Corporate tax returns must be filed no later than six months after the company’s fiscal year end. If money is owing, payments must be made within 90 days of the fiscal year end.   

When reporting income from a sole proprietorship or partnership, owners need to complete a Form T2125 Statement of Business or Professional Activities. For partnerships, there may also be an additional requirement to file a T5013 Partnership Information Return. Business expenses can be claimed to offset revenues and lower the amount of tax owing. The CRA allows any reasonable expense which is incurred for the sole purpose of earning business income.  Personal, living, or other expenses not related to the business cannot be deducted for tax purposes and it’s important for owners to distinguish between business and personal expenses throughout the year.

Among the business expenses that can be claimed as tax credits are accounting and legal fees, advertising costs, expenses for vehicles used in the business, insurance, office supplies, repair and maintenance expenses, salaries, telephone, travel, and more. Entrepreneurs operating a home-based business can claim a portion of household expenses including home insurance, rent, mortgage interest, property taxes, and utilities. The amount claimed must be proportional to the space used exclusively for business and the amount of space claimed should be reasonable. Exaggerating the home office dimensions to gain a bigger tax advantage could attract unwanted attention from the CRA. As a general rule, purchases and expenses are deductible if they are incurred to earn business income, supported by invoices, paid or payable by the registrant/corporation, and are reasonable in the circumstance. A full list of eligible expenses can be found on the CRA website.

Record keeping is crucial should you ever get audited. Records and supporting documentation are required to be kept for six years after the end of the taxation year in which they relate. Documentation can be kept in paper format or converted and stored in an electronically accessible and readable format. A source document includes items such as sales and purchase invoices, cash register and credit card receipts, cheques and bank statements, tax returns, delivery slips and deposit slips, etc. The books include such items as ledgers and journals.

Additional tax saving strategies include maximizing contributions to Registered Retirement Savings Plans (RRSP), Tax Free Savings Accounts (TFSA), and charitable income tax credits. Capital cost allowances, income splitting, and incorporating the business can also result in tax savings. To take advantage of strategies appropriate for the business, it is advisable to consult with a knowledgeable tax preparer such as an accountant.

To reduce stress at tax time, use best business practices throughout the year. Owners should keep business and personal expenses separate, document all business expenses, and keep all receipts no matter how small. Open a separate bank account for the business and deposit only business-related revenues and only withdraw business-related expenses (including the owner’s draw). Use a separate credit card for business purposes, keep a mileage log of any business travel, and keep all business records for the correct length of time. Paying taxes and other government remittances is all part of doing business. If keeping the books well-organized and sorting through the tax filing procedures is challenging, it is well worth the cost of hiring a bookkeeper or accountant to do that work. After all, the cost of hiring a professional is a business expense that can be claimed as a tax credit on the year end return.

Mark Jamieson is the Co-ordinator of the Orangeville & Area Small Business Enterprise Centre. He can be reached at [email protected], 519-941-0440 Ext. 2270 or via cell phone at 519-942-6334.