Are you a new, or perhaps confused, business owner who isn’t clear on what Canada Revenue Agency (CRA) requires at tax time? In this article I will explain the different business types and their needs, which will ensure you have peace of mind at tax time!
Whether you are starting a new business or merely selling something “on the side”, working as a consultant, earning money from a hobby, etc., all income must be claimed. How much income tax you pay will be determined by this business as well as any other income sources you have. When running a business, you reduce your taxes by also declaring any business-related expenses you incurred to earn this income.
It is important to know what type of business you have? It’s easy, as there are only three!
- Sole Proprietor – on your own
- Partnership – with a minimum of two owners (no maximum) OR
- A Corporation
What you need to provide to CRA, and how they determine how much income tax you owe, differs depending on the type of business.
A Solo Proprietor and Partnership are similar in the eyes of CRA, as the year end of your business is December 31st so that this income coincides with any employer (T4’d) income you may have. And the good news is, you are still using the General T1 Income Tax Return.
There is only one extra form you must fill in, a T2125 (Statement of Business or Professional Activities). It has 5 parts and is important that not only is the information correct but follows all the accounting rules. There are large penalties for making mistakes. CRA is not interested in your excuse that you “didn’t know that”. If this is all new for you, they expect you consult with a professional to ensure everything is on track.
The requirements for the Partnership are identical as the Sole Proprietor, the only difference is each partner will claim his portion of the Revenue and Expenses (the percentage is determined on your contract / agreement).
To prepare for the T2125, for a Sole Proprietor and Partnership, only the Income Statement is needed (to confuse the issue the Income Statement is also known as the Profit & Loss or P&L).
If your business is incorporated, the requirements for CRA are different. A Corporation can have any month as its year end. The year end is automatically 12 months after you register the corporation but can be changed if this date doesn’t suit you. Again, a great thing to discuss with a professional. The business is treated as a separate entity. A T2 Corporate Tax Return is required, and there is a lot more to it, so to reiterate, ensure you have a professional involved.
To prepare for the T2, both financial statements are needed: the Balance Sheet and the Income Statement (as a combo, they can be referred to as “financials”).
A note about incorporating, there are many reasons to incorporate, so be sure to review your reasons with a professional to ensure you are doing it for the “right” reason.
When seeking assistance, ensure the professional you hire is reputable, has experience in your industry and is clear on what you need and how much it will cost.
It is important to maintain your bookkeeping (books) throughout the year. Waiting until tax time can be costly and rushing can lead to errors and missed opportunities.
To avoid this crunch, attention should be made to record keeping throughout the year.
This is such an important topic, I have a lot more information to share. So, I will be writing another blog, Part 2, for the April 8th edition.
It will include:
- Understanding other external users of your financials and what they are looking for,
- Who you should hire, and for what tasks,
- How to maintain your books: software vs spreadsheet,
- What’s the best schedule to maintain “your” books, and
- More about the cost of hiring “accounting” professionals.
Sandy Tunwell is the Founder and Managing Consultant of accountrain inc., which celebrated 25 years in 2018. Sandy has combined her vast knowledge of accounting with her social skills to develop a unique approach to bookkeeping and accounting which has been recognized by many clients. She aims to have this high standard with her team by focusing on the how’s and why’s of accounting.
Since inception, the vision has been – to change the client / accountant relationship. We achieve this by being flexible, approachable and building trust.
Our focus is on small and new business. We go to the client, on an as needed basis. We’ve got you covered!
Our services include bookkeeping / consulting / training / and taxes.