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, this information 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 TAX DEADLINES
While the general deadline by which tax returns have to be submitted to Revenue Canada is May 2nd, 2022, for the 2021 calendar year, small business owners actually have until June 15th, 2022, 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 15th, CRA starts charging interest on any amounts payable after May 2nd. If you are not able to do your tax return by May 2nd, 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 2021 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.
All information relating to the business is reported on the T2125 form referred to 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.