Canadian tax for small businesses

If you are a Canadian resident there are several steps you must take to start a business legitimately. For income tax purposes, a business is defined as activity where there is a reasonable expectation of profit and there is evidence to support that intention. For goods and services tax/ harmonized sales tax purposes, a business can also include activities that are not engaged for profit, as well as any regular and continuous activity that involves leasing property.

The business structure you have chosen for your business will affect how you are required to report your business income, the type of returns you have to complete and many other aspects of your business.

 

Sole Proprietorship

A Sole proprietorship is an unincorporated business that is owned by one person (commonly known as a sole trader). The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits , claims all losses and does not have a separate legal status from the business.

 

Canadian Sole Proprietors and taxes

Canadian tax regulations state that all revenue generated by the business and claims all expenses incurred to earn this income on their T1 income tax and benefit return.

 

As a Canadian Sole Proprietor you also have to file a T1if you:

  • Have to pay tax for the year;
  • Disposed of a capital property or had a taxable capital gain in the year;
  • Have to make Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments on self-employed earnings or pensionable earnings for the year;
  • Want to access employment insurance (EI) special benefits for self-employed persons.
  • Received a demand from us to file a return.

Partnership

A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.

 

Canadian Partnerships and tax

A partnership by itself does not have to pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes their share of the partnership income on a person, corporate or trusts income tax return. This must be done whether the partner has received their share in money or as credit in the partnership’s capital accounts.

Partnerships that carry out business in Canada or a Canadian Partnership with Canadian or foreign operations or investments must file a Form T5013.

 

Corporation

A corporation is a separate legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owners.

 

A corporation has to file a T2 corporation income tax return no later than six months after the end of every tax year. This must be done even if it does not owe taxes.

 


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