What Unincorporated Small Business Owners Need to Know about Filing Their Taxes

Being a small business owner comes with challenges, not the least of which is doing your taxes.  While most Canadian taxpayers have relatively simple tax returns that can easily be completed using software, small business owners have the additional burden of reporting details relating to their businesses.  This can seem onerous, but understanding what needs to be done, and when, can significantly help reduce the stress and ensure that the tax filing process is smooth and straightforward.

One of the types of income on which you pay income taxes is what Revenue Canada (CRA) refers to as “income from self-employment” that is essentially the same as income from a small business.  If you do have business income, then you are required to declare your business income on a tax return.  As an unincorporated small business owner, this business income is reflected on a separate schedule on your personal tax return.  The schedule is called a T2125, which is a “statement of business activities” (discussed below) and at minimum requires that you show any income you earned from a business venture.  If you have incurred expenses to earn the business income, you may also deduct these from your gross revenues or sales to arrive at net income from business.  Unlike a simple personal tax return with no business income, the information that must be reported on a T2125 is generally not simply provided to you on a tax slip, such as a T4 or T5, but must be compiled and calculated.

---

---

Determine if you need to report small business tax income

If you earn income and you do not have an employer that provides you with a T4, you usually have to report this as business income on separate schedule of your tax return.  This applies to anyone who sells goods or services and includes consultants, self employed individuals and/or contractors.  There are also other ways in which Canadians earn income that might seem a bit ambiguous but usually must also be reported.  Some of these include:

·         Selling products on Instagram or Ebay

·         Having a blog or website that earns advertising income

·         Being a part time ride sharing (such as Uber) or delivery driver

·         Writers who receive any type of royalty or publishing income

Know Your small business Tax deadlines

While the general deadline by which tax returns have to be submitted to Revenue Canada is April 30, 2024, for the 2023 calendar year, small business owners actually have until June 17th, 2024, to submit their taxes.  This is also true for spouses of small business owners who may only have a regular(non small business) tax return.  It is important to keep in mind that while you will not incur any penalties as long as you submit your tax return by June 17th, CRA starts charging interest on any amounts payable after April 30th.  If you are not able to do your tax return by April 30th, you might want to consider estimating your taxes payable and making an instalment payment to avoid interest charges. 

Decide if you are going to outsource to an accountant or do it yourself

Preparing your own unincorporated tax return can be fairly straightforward, especially when using tax preparation software as it guides you through the process.  However, if you feel a bit overwhelmed by the idea of doing it yourself or if your situation is somewhat complicated, it might make more sense to outsource to an accountant.  If you are planning to outsource, you should find an accountant as soon as possible as they tend to be very busy at this time of year.  When speaking to a potential accountant, you should ensure that you have good communication and that they are responsive.  It can be worth paying a bit more for a service provider that is a great fit especially where your finances are concerned.

Know what type of information you need

Minimally, you are required to report your total sales/revenues from your small business for the 2023 calendar year.  You should also keep a record of your expenses that relate to your business as you may claim these against your income. Record keeping can be done by using a spreadsheet or if you have more than a few transactions per year, it might be useful to use accounting software as this can help you save time, ensure accuracy and allow you to have all your history in one place.  See my post on whether to use accounting software or a spreadsheet.

All information relating to the business is reported on the T2125 (also known as the statement of business activities).  The form requires some information about your business i.e. the type of product or service your selling.  It also requires input of a “NAICS” code which is a business code that most closely aligns with your business.  Tax software will usually provide a list of these codes in a dropdown. 

The T2125 also requires the percentage of income earned directly from websites (that might have a shop or display ads) as well as the URL of the websites.

Determine the types of expenses you can deduct

Every business owner is entitled to deduct expenses relating to their business, that are compiled by category as can be seen on the T2125 form.  Some of the more popular expenses include:

·         Direct costs such as the cost of materials to make your products, shipping, duties and amounts paid to subcontractors.

·         Advertising expenses which also includes website related costs, networking events and online ads.

·         Meals and entertainment that involve clients or business partners.

·         Bank charges for your business accounts.

·         Dues and subscriptions for monthly services that you use that relate to your business.

·         Office expenses required to run your office.

·         Home office expenses which can be claimed if you work exclusively from your home (rather than another office) and are based on the percentage of your home office to your total home. 

·         Motor vehicle (car) expenses including lease payments, gas, insurance, repairs etc. based on the percentage during the year of kilometres driven for work.

·         Capital cost allowance refers to larger purchases of furniture or equipment such as computer, printers etc. that cannot be expensed all in one year but must be depreciated over time.

Ensure that you keep all relevant documentation

While you are not required to submit any documents when you send in your tax return, it is possible that CRA will ask you for documents at a later date.  The types of documents you should ensure that you keep relating to your business include:

• Receipts and bills relating to your expenses.

• Invoices and records of payment by customers.

• Bank and credit card statements.

• Legal documents, contracts etc.

• Notices of assessment and other documents from the government.

• Spreadsheet with your data or reports from accounting software including a profit-loss statement.

I recommend scanning documents into an accounting folder on your computer as this makes them much easier to locate if you require them in the future and is also helpful for your own reference.

Understand your sales tax obligations

If your business is registered for sales tax (GST/HST and QST), it is essential that you understand your reporting and remitting obligations.  Reporting may by annual, quarterly, or monthly.   You should know how often you are required to report and ensure that the forms are completed and submitted on time.  If not, it might result in significant penalties and interest.  For annual filers, the sales tax returns are due at the same time as your tax returns which is June 17th.  Payments relating to sales tax are due by April 30th otherwise CRA will start charging interest on the amounts payable.  Similar to income tax, if you are unable to file on time, you should pay an estimated amount to reduce the amount of interest you will have to pay. 

Filing and payments for GST/HST can be done directly through CRA My Business Account.  Alternatively, if you have a business bank account you can usually access a special business tax filing service where you can both file and pay at the same time. 

See our post on FAQ for GST/HST for businesses.

Determine if you need to make Instalment payments

If your taxes payable for 2023 and 2022 (or 2021) exceed $3,000, CRA requires that you make instalment payments towards 2024 taxes.  Depending on the amount of taxes that you owed, these could be quarterly or even monthly.  If you are required to make instalments, CRA will notify you either by mail or by posting it to your “my account”.  Your tax software will also calculate the instalments for you.  Failure to pay instalments will result in interest that starts to accumulate after the due date.

Sign up for CRA my account and CRA my business account

All Canadian taxpayers have access to an online portal referred to as “my account” where they can see information relating to their taxes including notices of assessment, balances due, RRSP and TFSA contribution room and a variety of other types of information. 

Small business owners can also sign up to CRA “my business account” to see information relating to their GST/HST and payroll for those of you with employees.  It also allows you to file returns online and submit documents if you are ever audited. 

Having a small business does mean additional administrative work, but all of it is manageable with a solid understanding of your obligations and good processes in place.  This ensures that you submit your tax filings on time ,avoid paying unnecessary interest and/or penalties and helps to reduce the inevitable stress that most of us feel when it comes to doing our taxes.   

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services. Subscribe to her biweekly newsletter to receive articles on financial literacy, tips, tools and special offers for small businesses.

An earlier version of this article also appeared in the April 14th, 2022 edition of “The Tax Letter”