Staying on top of small business income taxes

As an entrepreneur, it's helpful to understand tax strategies that maximize business income tax deductions and filing requirements to avoid interest and penalties.

During this 60 minute webinar, Vartika Satija covers Canadian income tax questions related to running a business including:

• Which Canadian income tax return do you need for your small business?
• How to comply with Canadian tax standards as a sole proprietor versus a corporation?
• What business expenses are legitimate Canadian income tax deductions?
• Can you claim expenses on income tax without receipts?
• What are the Canadian small business corporate tax rates, including tax rates for provinces and territories?
• When must Canadian corporate income tax returns be filed? What happens if not filed on time?
• What are the chances of corporation being audited by Canada Revenue Agency?

Key takeaways

The tax structure of a corporation versus a sole proprietorship.

“A sole proprietor has no separate legal existence from its owner, so all income and losses are taxed on individuals personal income taxes. However, if you incorporate a business, the corporation becomes a separate taxpayer with income and expenses taxed to the corporation and not the owners. But any profits that are distributed to the owners—either through salaries or dividends—owners must pay personal tax on those distributions,” says Satija. 

Which Canadian income tax return do you need for your small business?

“If you are a corporation, you need a T2 corporate income tax return. If you are a sole proprietor, there is a form that goes in addition to your T1 personal tax and that form is called the T2125 statement of business schedule,” she says. 

GST/HST registration for small businesses.

“Whether you’re a sole proprietor or an incorporated business, you have to collect GST and remit GST to the government if you make over $30,000 in revenue during the year,” she says. How much you need to collect and remit to the government will depend on which province your corporation is registered in and where it provides services. Once you have registered for GST/HST, you must collect the taxes and file with the government each year even if there are years you don’t make $30,000, she says. 

What happens if your corporation doesn't file it’s taxes on time?

“The amount you will owe to the government is 5% of the amount that you owe [as] your basic penalty. On top of that, [you] pay 1% multiplied by the number of months your taxes payable is overdue,” she says. For example, if your taxes due to Canada Revenue Agency (CRA) is $9,500 and you are three months overdue, you will owe the government $475 (5% of the balance) plus $14.25 (1% of the penalty cost times three months) for a total of $489.25 in penalties.  

What counts as business use of home expenses?

“You can definitely deduct your expenses for a business workspace in your home as long as you meet one of these criteria,” says Satija. “Either that it is your principal place of business or you use the space only to earn your business income and you use it on a regular and ongoing basis to meet your clients, customers or patients.” 

What portion can you claim for your home office? Take the square footage of the space you’re using for a home office and divide that by the total square footage of your home and multiply by 100. This percentage is used to calculate how much of your home-related expenses are tax deductible.

“Always remember that you cannot use business use of home expenses to create a loss. So if you are already in a loss position, you will not be allowed to claim your home expenses. It’s only if you’re in a profitable position to reduce your profits or to bring it down to a nil position. However, if you don’t require to use your home expenses in the current year, you can definitely carry it forward for future years,” she says.