As with employment income, your small business income is subject to tax. If you are new to the Canadian business environment, you may not be familiar with the tax laws that apply to small businesses and the self-employed. This article will give you an overview of how taxes work for small business owners in Canada and answer some common questions newcomers have about corporate income tax.

What does it mean to be a small business owner?

Any business or enterprise, including but not limited to a profession, trade, or manufacturing enterprise run for profit, falls within the definition of a business. In Canada, you don’t need a physical store or employees to run a small business.

You can choose to focus on your full-time or part-time self-employment while maintaining a regular job. As a beginner, if you do freelance or side jobs like carpooling, dog walking, food delivery, consulting, content writing, etc. In your spare time, you qualify as a small business owner.

What taxes do I have to pay if I run a small business?

As a small business owner, you will pay corporate income tax on the profits you generate from your business. In Canada, you are required to pay both federal and provincial or territorial income tax.

Depending on your business, you may also be required to collect Goods and Services Tax (GST) or Harmonized Sales Tax (HST) from your customers and remit it to the CRA along with income tax. You do not need to register for GST/HST if your business income for four consecutive quarters is less than $30,000. However, if you sell, lease or otherwise make taxable supplies in Canada, you can voluntarily register for GST/HST even if you do not meet the minimum threshold.

As a small business owner, it’s also important to keep in mind that after the first year, you’ll likely have to start paying your taxes in quarterly installments. Talk to a tax accountant to sort out your small business taxes.

Does my business structure affect my t2 tax return?

The taxes you pay will depend on your business structure. Most small businesses start out as a sole proprietorship or partnership. These structures are not incorporated and you must declare your business income on form T2125 together with your T1 personal income tax return. If you are self-employed or self-employed, the applicable rates will be the same as the personal income tax brackets.

If you have started your own business, you will need to file a Corporate Tax Return or t2 tax return. Incorporating your small business can provide significant tax benefits. Before making your decision, you should learn more about the pros and cons of each business structure.

The basic federal tax rate for corporations is 38 percent of taxable income or 28 percent after the federal tax abatement. However, Canadian-controlled small businesses are eligible for the Small Business Deduction (SBD) on income from Canadian operations, effectively reducing the federal tax rate to nine percent.

Provinces or territories typically have a lower and higher corporate income tax rate, with the lower rate applied to deductible small business income. Provincial and territorial rates are reviewed each year, and effective January 1, 2021, the lower rates are in the range of zero to three percent.

Talk to a tax accountant to sort out your small business taxes.

What counts as a business expense?

Only business expenses can be claimed as business expenses for tax deductions. Some eligible business expenses include advertising, meals and entertainment, insurance, office expenses, professional fees, rent and maintenance, property taxes, salaries and benefits, utilities, travel expenses, automotive expenses, capital allowances, and household expenses for business use.

Note: Salaries and benefits received by the business owner or partners in unincorporated businesses are not counted as business expenses and are not tax deductible. If you’ve set up your own company, be sure to compare the tax implications of taking a paycheck for yourself versus putting the money back into your business, as you’ll have to pay corporate tax on your organization’s total profits and thus pay natural persons on your salary.

What documents do I need to keep as part of my business records?

While the CRA doesn’t specify what documents businesses or entrepreneurs must keep, some basic accounting documents you should have on your records include sales invoices, purchase invoices, cash receipts, formal contracts, credit card receipts, bills of exchange, delivery, deposit slips, cheques, bank statements, t2 tax returns, and financial correspondence in general.

In addition, accountants’ working papers that were used to determine tax obligations and claims are considered part of the taxpayer’s books and records and must be made available to the credit rating agency upon request.

How can I manage my business finances?

While you may be an expert in your business, you don’t necessarily have a thorough understanding of Canadian tax laws. Fortunately, there are tools and experts you can turn to for help.

There is software on the market that make it easier to manage small business finances and track income and expenses, such as QuickBooks Self-selected. You can also file your self-employment income tax using software such as H&R Block, TurboTax, Freshbooks, Ufile, or TaxTron.

Bottom line

Canada has severe penalties for tax evasion and late payment of taxes for small businesses. If the CRA discovers that you knowingly misrepresented or withheld information on your tax return, you could be charged a fine of $100 or 50 percent of the underreported tax or over reported tax credits, whichever is greater. Serious cases of tax evasion can also lead to criminal convictions, heavy fines, and even prison time. As a small business owner in Canada, a portion of your business income will go towards paying corporate income taxes. Whether you’re writing your business plan or have already established your business, it’s important that you understand the taxes that affect you, the tax filing process, and the tax deductions you may claim.

Talk to a tax accountant to sort out your small business taxes.

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