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Small income business tax session scheduled for Feb. 26

February 15, 2019   ·   0 Comments

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 income. This is because an unincorporated business and its owner(s) are considered one entity in the eyes of the law and the CRA. Unincorporated businesses have until June 15th to file but if money is owed, interest starts to accumulate as of April 30. Incorporated businesses are separate legal entities and report revenues on a T2 corporate income tax return. Corporate taxes must be filed no later than six months after the company’s 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 form. Business expenses can be claimed to offset revenues and lower the amount of tax owing. The CRA allows any reasonable expense which is appropriate to the business and used in an attempt to make money. Personal, living, or other expenses not related to the business cannot be deducted for tax purposes so 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 for 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, heat, and hydro. 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. A full list of eligible expenses can be found on CRA’s website at www.canada.ca/taxes.

Additional tax saving strategies include maximizing contributions to Registered Retirement Savings Plans (RRSP), Tax Free Savings Accounts (TSFA), 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 a knowledgeable tax preparer such as an accountant.

Tax time is also when self-employed people pay into the Canada Pension Plan (CPP). Entrepreneurs earning more than $3500 net income from their business must pay both the employer’s and the employee’s share of the CPP premium amounting to 9.9 percent of 2018 pensionable earnings.  

Business owners who want to complete their own tax return should consider purchasing tax preparation software that has been E-File certified, meaning it will be compatible with CRA’s electronic filing system. Cantax, TaxTron, and U-file are a few of the approved software programs listed on CRA’s website. If the business is incorporated, ensure the software includes the T2 tax return. 

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 withdraw only 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 be sure to keep all business records for the correct length of time. For tax purposes, records must be kept for a minimum of six years after the end of the taxation year to which they relate.

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 and can be claimed as a tax credit on the year-end return.

To help entrepreneurs understand tax regulations, the Orangeville & Area SBEC is hosting Tax Planning for Small Business, February 26th, 6:30–9:30 p.m. Presented by Gerry Hogenhout of Hogenhout and Associates, this informative session will provide valuable tips and essential rules for operating a small business and minimizing or deferring income taxes payable. Register online at www.orangevillebusiness.ca/events, contact the SBEC at 519-941-0440 Ext. 2286 or email sbec@orangeville.ca. 

Ellen Sinclair is the Co-ordinator of the Orangeville & Area Small Business Enterprise Centre. She can be reached at esinclair@orangeville.ca or 519-941-0440 Ext. 2270. To sign up for notifications of SBEC programs and events visit www.orangevillebusiness.ca/subscribe.

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