Guest Blog - Beginner's Guide to Taxes for Entrepreneurs and Small Business Owners

There are many perks to being your own boss, but of course there are costs as well. As a business owner, you will have to ensure you are making tax payments and properly maintaining records. To avoid getting caught behind on this issue, it’s imperative to be proactive in understanding the tax compliance rules established by the Canada Revenue Agency (CRA). Doing so can help you avoid interest and penalty charges and ensure you are maximizing on deductions and ready to respond if you are ever audited by the CRA.

Vartika's Tips

Keep track of documentation and save for six years

Receipts provide the support for how much money you spent throughout the year. Ensure that you hold on to all receipts and invoices pertinent to income earned from your business. CRA recommends holding on to paperwork for up to six years. If you lack back-up documentation, CRA has the right to impose interest or penalties, and your claims can be disallowed. Whether you are incorporated or running as a sole proprietor, make sure to segregate your personal documents from your corporate documents (For example, open a separate business bank and credit card accounts to incur business related transactions only).

Keeping track of all required paperwork can be a hassle and can result in misplacement or accidental discarding. However, there is a solution! I recommend using apps like Expensify, Hubdoc, Receipt Bank, QuickBooks online, Xero and many more that will capture, store and organize all your receipts on a single platform for you. You can import receipts or invoices from photos or even forward them from your email. These apps automatically and conveniently extract line items from each receipt using artificial intelligence and sync with most cloud-based accounting software, easily allowing you to keep a track of all your documentation and maintain proof of every expense deduction claimed on your tax return.

Make it a priority to keep your financial records—from your business receipts to your employees’ payment records—organized and in check all year round. Again, make sure to track the business transactions separately from your personal transactions.

Consider incorporating your business

From a tax point of view, incorporating your business can be beneficial, especially if your business has reached a steady profitable level and you are able to set aside a portion of your business earnings to keep in the corporation. Incorporating will allow you to benefit from corporate tax deferral strategies, as your corporate profits will be taxed at a much lower rate in comparison to personal income unless and until you decide to pay yourself a bonus or dividend.

Determining how to structure your company is an important decision that may have a significant impact on your business going forward. It can be valuable to consult a qualified tax and legal advisor to ensure that you have taken into account all of your considerations before deciding whether or not to incorporate.

Set aside a budget for income taxes

The moment you start bringing in income, you should create a budget for taxes. Unlike salaried employees, payroll deductions such as Canada Pension Plan (CPP) and income taxes are not withheld from your business income at source. Therefore, it is crucial you set aside funds for the taxes you’re required to contribute to by the annual deadlines (more on that later).

To calculate your estimated taxes, you need to estimate your net business income (after eligible deductions) and figure out the tax rate your income will fall into. If you are operating as a sole proprietor, you will need to determine your personal tax bracket for both federal and provincial taxes - check out CRA's website, which provides information on both. If your business is incorporated, your business will be also be subject to both federal and provincial corporate tax rates (see here for details), on top of your personal taxes for any bonus or dividends you are paid out of the business. Once you have estimated your taxes, consider setting aside that percentage of your earnings and segregating the money into a separate account until you’re ready to make the payment. You also have the option to send that money to CRA in advance as an interim installment payment applied against a respective tax year end.

Keep track of your income tax deadlines and arrange CRA payments

Whether your business is profitable or not, it is mandatory to provide the business’ income and expense details on your income tax return. The following are the returns you may need to submit, and the timelines in which they must be submitted:

• Regardless of how you have set up your business, you will need to file to your general personal income tax return (T1). Your T1 return as well as any taxes owing are due by April 30th each year.
• If your business has employees, you are required to withhold payroll deductions (such as income taxes, CPP, and EI) from the employees. These withholdings must be remitted to the government by the 15th day following each month, or sooner if the monthly withholdings are greater than $25,000. (Note: Should an owner-manager who owns more than 40% shareholdings in their corporation pay themselves a monthly salary or yearly bonus, they don't have to contribute into EI.)
• If you are operating a sole proprietorship, you will need to complete and submit the T2125 form (Statement of Business and Professional Activities). The deadline for filing this return is June 15th. However, you must pay any taxes owing by April 30th to avoid interest charges.
• If your business is incorporated, its corporate tax return (T2) is due within six months of its fiscal year-end. (A fiscal year end can be any date you choose, but you must formally register that date under your corporation.) However, the payment of taxes is due earlier. Typically corporations are required to make installment payments at deadlines set throughout the year, and any balance left owing is to be paid within 2 months of the fiscal year end. (This may be extended to three months after the fiscal year end for certain corporations, including Canadian Controlled Private Corporations (CCPCs).)
• If you are personally a member of a partnership, you will need to file form T5013 no later than March 31st each year. If you own a corporation that is a member of a partnership, the deadline for filing is within five months of the partnership's fiscal year end.
• There may be information returns related to your business which you are required to file, such as a T4 for any employees or T5's for shareholders. These are to be filed by the last day of February after each year.

If your tax owing is more than $3,000 in the current or previous two years, CRA will require you to pay quarterly installments, failing which you will incur interest and penalties. Regardless, in order to avoid being hit by a huge tax bill or missing deadlines, it may be wise to make monthly or quarterly tax payments to CRA based on your estimated annual income by setting them up as an online vendor via online banking.

Know your deductions

In addition to direct business expenses, there may be other expenses you can deduct when determining your business's net income for tax purposes. Here are a few of the top tax tips to maximize your deductions: 

Business use of home expenses

Many self-employed individuals operate from offices at home, but not all realize that you can deduct expenses related to your home office. These can include insurance, mortgage interest payments, repairs, utilities, and other home-related expenses, but eligibility depends on how your home office is set up. 

If your home office is eligible for this category of deduction, you have to determine what portion of your home is dedicated to running your business. The formula used is: % of total square footage used by home office x total eligible home expenses

Motor Vehicle Claims

Personal motor vehicle use for earning business income can be claimed as a portion of business expenses. You can calculate the percentage used for business trips and apply it to your overall car expenses. In practice, you must keep a logbook to track the total kilometres driven plus business kilometres driven during the year to be eligible for this deduction.

A word of caution: As per CRA, travel between a regular workplace and home is not considered business-related because most workers are normally required to work away from your principal place of residence or in different places.

Operating losses and prior years taxes

If an operating loss in any given year exceeds your other sources of income, keep in mind that the excess may be carried back three years and applied against taxable income in prior years, resulting in a refund of taxes paid in those years. If you’re unable to carry back the loss or choose not to, it can also be carried forward for up to 20 years.

GST/HST registration

Incorporated or not, you are required to register for a GST/HST number once your business's gross income reaches $30,000 in a 12-month period unless you sell items that are GST exempt. Once this is achieved, you will need to start charging and collecting GST/HST from your clients and customers, depending on the province in which the business or person you’re charging has their tax base. It is your responsibility to register voluntarily. The government will not send you a notice or warning to register for a GST/HST number.

A Final Word From Vartika

While we hope this beginner's guide will help you keep on top of taxes, it's easy to see how a business owner can become overwhelmed by all of the requirements. Don't put off dealing with them - if it is overwhelming or you simply don't have time to focus on taxes, talk to an expert who can help you get organized and even complete some or all of these tasks on your behalf. You will find it is worth the expense to make sure you don't get caught behind or underestimate the taxes you must pay.

Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact your advisor or accountant to discuss these matters in the context of your particular circumstances. Neither Vartika Satija, CPA, CA nor Charla Smith & Company Ltd. accepts or assumes any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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