If you’re an unincorporated small business owner or are self-employed, it’s time to prepare your receipts and income statements for the upcoming tax season.
If this is the first year you’ll be filing as a small business owner, or you’ll be doing it on your own rather than working with an accountant, there’s a lot you need to know.
Let’s review Canadian tax brackets, preparation tips, and steps you’ll need to take to file your 2022 income taxes in 2023.
Understanding different tax brackets and what they mean for your small business can get somewhat complicated. Products like QuickBooks Online make it easier to find appropriate incentives and tax deductions that you can take advantage of.
Once you understand how to navigate the tax code, QuickBooks allows you to keep a record of all your expenses, inventory, payroll, and payments all in one place. It offers a method that works faster and more accurately than using the manual pen and paper process.
Each of the tax brackets changes the amount you are expected to pay within that bracket, like stratified layers, so a high-income earner pays differing amounts of tax depending on the income between two brackets.
This process is repeated until the taxpaying unit, such as yourself or your business reaches the highest bracket. At that point, anything above the maximum amount is taxed at the same rate on all additional monies the company or individual earns.
These tax brackets are for self-employed, sole props, and partners.
Depending on the province you conduct business in, there are different tax rates to take into consideration.
How your business is structured will have an impact on the way you’ll need to file your taxes and when.
You are considered a small business owner if you own any small business. You’re also considered self-employed if you operate a business where you are the business, such as:
Likewise, if you do dog walking as a side gig or sell your homemade pies at the local farmer’s market, you’re also self-employed and are considered to have a small business.
Most small businesses begin as sole proprietorship’s which means you run your business by yourself and your business is unincorporated. As a sole proprietor (or sole prop), the details about your business are included on your own personal tax return.
Any profit you made is added to your income, and any losses are deducted from your income. If your business made $35,000 this year, you made $35,000 this year.
If your business falls into these categories, then you’ll need to file your income tax during income tax season.
A tax return must be prepared and filed annually and the 2023 deadlines vary based on your business type.
There are also certain scenarios where it might make more sense for you to pay your taxes in four installments throughout the year.
If you file late, you will be required to pay 5% on what you owe with an additional 1% of the balance for each full month that your return is late. The CRA does grant extensions for certain extreme scenarios, but it is important to file on time to avoid penalties.
As a business owner, you can prepare for tax season throughout the year by using a business credit card and checking account, keeping detailed logs of expenses and uploading your receipts digitally.
You also have to decide how to file your taxes. Many business owners opt to hire an accountant for tax time or see the benefits of using an accounting software year over year to walk them through the process.
You can also access the CRA My Business Account personally to ensure all of your information is up-to-date, access your payroll, make a payment, file a rebate and much more.
Some Canadian business owners are also opting to file via Net File or accounting software such as QuickBooks. You can contact the Canada Revenue Agency via a free support service or at the CRA phone number, 1-800-959-8281.
A1: False. Many businesses don’t see a profit in the first year (or more). You are still required to include details of your business on your tax return. If your business actually lost money, you can apply the loss to your other income.
A2: False. Although you may not owe any taxes on your business income, you may be responsible for Canada Pension Plan contributions. As a small business owner, you pay both your share of CPP and the employer’s share. The amount due is calculated by TurboTax Self-Employed on your tax return.
A3: False. The CRA doesn’t have special rules for small business owners who are still in school. The details of your self-employment must be included when you file your return.
Next, let’s examine everything you’ll need to prepare your 2022 tax returns this coming April and for future tax seasons.
The self-employment section of your tax return is made up of three parts:
All the general details about your business including the;
Your business’s income is exactly what it seems. It’s the income you’ve earned by selling products, performing a service, and more.
Depending on the type of business you own, other information (like subcontractor’s payments, GST/HST amounts, or discounts) may be included in this section. Keep in mind that this section is for gross income (before expenses). You’ll factor in all of your costs in the next section.
It takes money to make money right? You’ve likely shelled out a bit of cash to run your business.
Common Business Expenses include:
There may even be costs you hadn’t thought of as business expenses. Did you operate your business from home? You might qualify to claim home office expenses. Use your car for deliveries? You may be able to claim a portion of your fuel, repairs, insurance, etc.
Claiming all of your business-related expenses is especially important for two reasons:
Once you’ve taken all of the costs of running your business into account, you’ll be able to determine if you’re making as much money as you think you are.
If you don’t have a solid understanding of small business finances and taxes, or what small business tax deductions are possible, it may be in your best interest to employ a tax professional.
In only a few hours, they can help you sort through and summarize all of the information needed to pay your taxes, freeing you up to focus on the day-to-day operation of your business.
It’s a lot less expensive if you plan ahead and compile as much information as possible prior to scheduling an appointment with your accountant. Every small business is different, so the information needed will differ, but will generally include: gross income, client invoices, records of goods sold, salaries, sales records, last year’s tax return (if applicable), receipts for office supplies, and more.
If you would rather do your own taxes and not take advantage of a CPA, you could take tax preparation classes or research online sources to help you make sense of the tax forms needed to file your business taxes accurately.
Online resources will help define terms like earned income, premium tax credits, refundable credit, filing status, earned income tax credit, and show you how an IRA, health insurance, and child tax credit can affect your return.
Let’s go through the top five documents that you or your accountant will need to complete your tax return.
A financial statement communicates the financial health of a business and usually includes a cash flow statement, a balance sheet, and an income statement.
For tax purposes, the income statement, or profit and loss statement, is particularly important to your accountant, but he or she will likely request a summary of your company’s assets and expenses as well.
The cash flow statement summarizes how well your company manages its cash position, and how well the company generates cash to pay its obligations or fund its expenses. The balance sheet shows a company’s assets and liabilities, as well as the owner’s equity at any specific period of time. The income statement focuses on your company’s revenues and expenses over a particular period.
Because your company’s financial statement provides you with a formal record of all financial activities, it’s a necessity during tax time to ensure the accuracy of your taxes.
A capital asset is an asset that benefits your business for more than one year. It’s typical for a business to have many assets.
When an asset or assets are sold, they must be classified as either a capital asset, depreciable property, real property used by the business, or item for sale to customers, such as inventory. The sale of a capital asset results in capital gain or loss.
During the year, if you traded, bought, or sold any tangible or intangible capital assets owned by your business, you’ll need to account for these transactions on your tax return.
Familiar types of tangible capital assets include land, equipment, buildings, or vehicles. Whereas intangible assets may include copyrights, patents, and trademarks.
If you use accounting software, be sure to print out any capital-asset activity so your accountant has the details necessary to file an accurate tax return.
For example, if an asset’s selling price is higher than the companies’ purchase price of that asset (plus any capital improvements and cost of sale), the result is a capital gain, whereas if the selling price is lower, the result is a capital loss. Either way, capital-asset activity affects your companies bottom line.
There might be times when you must use your personal vehicle for business purposes. When you do, you can claim a portion of your vehicle’s operating expenses as a tax deduction.
You must also keep track of all mileage (or kilometres in Canada) used for business in a vehicle log. This can be as easy as jotting down kilometres, dates, and descriptions into a notebook, or you can use software to easily keep track of your mileage. Whatever method you prefer, be sure to bring a copy with you when visiting your accountant at tax time.
If you use a portion of your home exclusively for business or if you regularly meet with clients or customers in your home office, you can generally claim home-office expenses.
These expenses include a percentage of your home insurance, mortgage interest (or rent), utilities, repairs, and maintenance. But, there are two requirements for your home to qualify as a deduction: it must be the principal place of your business, and you must use the section of your home that you plan to deduct exclusively for that business.
The most exact way to calculate your home-office deduction is to divide the square footage of your office space by the livable square footage of your home. Using this calculation, multiply your total home expenses by the home-office percentage.
Some accountants will ask for your original receipts, including indirect and direct expenses, while others will only want a summary of expenses. Check with your accountant to see which he or she prefers, and compile your documents prior to scheduling a meeting.
It’s likely you’ll receive a statement from your mortgage company or bank at the end of the year that summarizes your mortgage-interest and property-tax payments throughout the year.
Your accountant may ask you for this document to claim the mortgage-interest deduction that all homeowners are entitled to, and your accountant will use it as part of your home-office deduction. If you carry multiple mortgages, be sure to provide documents for each mortgage.
Even if you decide to hire an accountant, there are some general tax preparation tips you’ll need to keep in mind. We’ll review those next.
Whether your small business venture is just a few hours a month or your full-time gig, good record-keeping is essential.
Here is a master checklist for filing taxes outlining the crucial reports and documentation that you need to aggregate. There is also technology that can help you throughout the year or at tax time including apps that track receipts, time and inventory.
To make the process seamless and reduce stress, there are many tactics you can do throughout the year to avoid overpaying on taxes and even some loopholes that you should be aware of. This ranges from using a business credit card for purchases to incorporating your business legally instead of claiming all profits as your income.
Some self-employed professionals also switch personal assets to business assets to maximize savings. If you have employees, there are also many employee tax considerations that you need to know to manage your business.
This ranges from determining if you elect to pay for their parking (this is a taxable benefit) to providing technology.
Both the CRA and QuickBooks provide calculators and other tools to walk you through the process of calculating certain types of taxes. Here’s a list of common types:
Net tax
If your business makes over $30,000, you are required to charge your customers sales tax (GST/HST) on all purchased goods and services. However, there are ways to save money by calculating a tax credit.
Learn how to figure out your net tax.
Depreciable assets
Many business assets, such as machine equipment or cars, depreciate year over year with use. Is helpful to calculate the depreciation rates to understand when is the best time to get rid of equipment and rebuy.
Payroll tax
As an employer, you have to calculate the deductions from your payroll. QuickBooks Canada has a payroll deductions online calculator for all people with the exception of Quebec. To understand what to gather and how to use it, you should take a few minutes to learn the ins and outs of the payroll deductions.
Capital cost allowance
You have the ability to subtract business expenses from your tax return. However, it is important to note that the CRA has different classes which guides you to what percentage you can take from the cost of each expense. Get more examples based on your business.
Using the bonus method
Employers typically withhold taxes from paycheques as if the employee gets paid the same for the duration of the year. But, what if there is a large bonus or commission structure? This is where the bonus method comes into play.
You make an educated guess on base pay plus the employees bonuses for the year. Then, look at the tax bracket and determine how much more to withhold.
Taxable automobile benefits for employees
If you require your employees to drive, you may need to account for this in your pay cheques. Luckily, the CRA offers an online calculator and we have a comprehensive taxable automobile benefits guide to show you how to use it easily.
Cross-border shopping duty and excise taxes
Cross-border shipping is sometimes a necessity and profitable. However, there are nuances to the tax laws that will allow you to determine if it is worthwhile to import. Learn how to calculate your duties prior to making that crucial decision with the cross-border shopping duty & excise taxes guide.
Tax forms
What it does: This is a form that self-employed professionals and small business owners use to report their income and expenses to the CRA. We will break it down for you here.
What it does: These slips are for businesses who elect not to use QuickBooks software and manually list what you paid to your employees over the calendar year. Learn how to complete your T4 and avoid common mistakes.
What it does: As a small business, you might require your employers to use personal cars or other materials that your employees can claim these deductions personally. However before they can do this, a small business has to show the government that this is permitted and truthful. Learn what’s at stake for you with FormT220.
What it does: If you are a partner in a business, it is essential that you report your share of the business. To understand those nuances and better understand how to file, check out our T5103 guide.
What it does: If you are hiring an American that is a contractor, learn the essential steps for ensuring the 1099 is completed accurately. Need to make changes to any of the tax forms? Find the path of least resistance here.
If your business is not publicly traded and based in Canada, there are tax write offs and deductions that you should be aware of. Our comprehensive deduction guide breaks down the differences between a tax credit, how to claim them, and steps to determine if it applies to your business.
We’ve also created a master list of business expenses that you can deduct to help you prep for tax time and broke down a few of the applicable expenses below.
Here are the key definitions and business examples you’ll need for all of your tax questions — with more information available in the below links.
A business number is a series of nine digits that the Canada Reserve Agency (CRA) uses to identify your business in communications with the federal government. Businesses with at least one employee typically need to register for a business number.
A corporation key is a password assigned by the CRA. You can use this to access the Online Filing Centre, which processes your business’s tax information.
A deferred tax is a current tax payment that you push into the future, often through an investment or retirement account. Inflation and payment control are the main benefits of these taxes.
Excise duty is a tax charged on certain Canadian products, such as wine, spirits, and tobacco. These products incur excise duty at the point of manufacture before they are sold to customers.
A fiscal pardon is a type of tax amnesty that allows you to rectify any unpaid, unfiled, or unreported taxes from previous years without fear of large fines or criminal penalties. To take advantage of this tax pardon program, you must apply with the CRA.
An inclusion rate is the rate that the CRA uses to determine taxable capital gains and allowable capital losses. This helps you figure out how the profit or loss from the sale of property fits into your tax return.
Marginal income and marginal income tax may sound similar, but knowing the difference is key to running your business. Marginal income refers to the difference between sales revenue and variable costs, and marginal income tax refers to tax brackets.
Marginal and effective rates can help you develop a strategy for a tax year. Marginal tax rates are based on the income tiers that the Canada Revenue Agency uses at the federal level, and your total tax liability as a percentage of your income is your effective tax rate.
NOPAT is a simple formula: revenue minus operating expenses minus taxes. This measures your company’s after-tax profit typically used to compare financial results over time — or to calculate economic value added.
Old age security clawback refers to the pension you receive if you’re 65 years or older — and if the Canadian government takes back money that it previously paid. This commonly occurs when the government imposes a special tax on old age security payments for certain individuals or income levels.
Operating leases and capital leases are both options when you need buildings or equipment for your business. An operating lease allows you to occupy property without the risks (or benefits) of owning it, while a capital lease gives you ownership rights in the property you’re leasing, while the lessor finances it.
A payment “in lieu” of taxes is what you pay the federal government instead of paying taxes. This typically comes up when the government compensates a municipality for services (such as water, roads, garbage, etc.) without giving up its overall tax exemption status.
A prepaid asset is a financial resource available for future use. You can use it over time, or it may be something you benefit from down the road.
Provincial and territorial corporate tax rates are the rates that provincial and territorial governments levy on your corporate profits. This is one factor in how much you’ll pay on taxes.
The acronyms PST and TVQ/QST both relate to sales tax. PST stands for provincial sales tax, which is applied when a province doesn’t participate in the Canadian harmonized sales tax. TVQ/QST stands for Taxe de Vente du Québec/Quebec Sales Tax, which Quebec collects on sales or supplies of most services and property.
A refundable tax credit lowers what you owe to the CRA and reduces your tax liability — even if you don’t owe any taxes or if it takes your liability to less than zero.
A robot tax applies to your business if you’ve used a robot to automate a process or replace workers in your business. It requires you to pay the government a tax based on how much money each robot makes or the profits that come from the labour savings of a robotic workforce.
A standby charge reports the benefit your employee gets when you make your owned or leased automobile available for their personal use.
A transit number is a series of five digits that identifies your specific bank branch. This is the first series of numbers listed along the bottom of a cheque.
GST/HST are different types of sales taxes that vary by the province in which your business resides. There are also some provinces where both PST and GST are due, only GST is due and others where HST is only required.
All of these should be charged to customers and acquire varying degrees of percentages from a sale of a service or good. Your GST/HST typically has an annual reporting period, though you can adjust it to accommodate your increased sales and taxable supplies. There are also a few situations where you can avoid paying GST.
The CRA also outlines certain scenarios where a good does not require a tax and exempt. This varies from school fees, child care services, used housing and more. There are also some basic livelihood goods that are charged a tax but at 0%. This zero-rated category is common for agricultural products and certain medical supplies. Understand the distinctions between taxable, exempt and zero-rated supplies.
GST/HST is only applicable for businesses that make $30,000/per year. However, some choose to voluntarily register for a GST/HST Account and charge sales tax to their customers. (You can also close a GST account if need be.)
One benefit to a small business is the ability to recover the taxes that you purchased for their business, also called input tax credits.
Taxes vary from province to province. So, there will be tax differences based on your business’ location. We’ve aggregated the most important things to note whether you operate out of Quebec, Manitoba, British Columbia, Saskatchewan or Ontario.
Taxes and legislation vary across industries. To break down these discrepancies, we developed our master industry taxes guide. You can also just navigate to what industry best applies to you.
Canada has detailed classifications and it is important to learn the differences between charity and non-profits at tax time. For example, if you are advancing education or relief of people in poverty then you would be classified as a charity. However, organizations that are focused on sports or hobbies are classified as non-profits.
If you are classified as a charity, you can issue tax receipts to your donors which can be given back to up to 50% of the donation. This depends on your province; however, it can be a huge selling point for recruiting potential donors. There is also a first-time super credit given to new donors which can help the cause. And, rules that vary based on political activities.
All of receipt rules for registered charities should be thoroughly documented according to the CRA regulations and prepared ahead of time to make it easier at tax time.
You may qualify to claim various amounts related to your self-employment, but the law doesn’t stop there. In brief, some of these programs include deductions and credits for your family, child care, and caregivers.
You can claim amounts for your spouse, your common-law partner, children, and other eligible dependents. Claiming deductions and credits for the cost of education as well as fees relating to a person with physical or mental challenges during activities and functions are all acceptable if you meet the new criteria.
If you’re a pensioner, you can claim amounts relative to the money you receive and save. Keep in mind these are federal programs.
Each province and territory also has its own specific claims and deductions, so be sure to look them up depending on where you reside.
For the 2022 tax year, increasing amounts of money taken from your paycheque by the Canada Pension Plan (CPP) are partially offset by the falling amount the CRA is collecting for Employment Insurance (EI). CPP rose in 2022 is 5.70%. Canada wants more people to save for their retirement, and so 2019 is the first of a seven-year cycle of increasing CPP.
If you work for a separate company besides your self-employment, your employer matches those funds. However, the CPP hits the self-employed — twice once as the worker and once as the company owner, but that rate is falling because the CRA is dropping the self-employed business rate a full point from 10% to 9%.
By contacting Service Canada and entering into an agreement with the Canada Employment Insurance Commission, you can participate in the EI program for access to EI special benefits, like paid mat leave or sick leave.
To do so, complete Schedule 13, which calculates your EI premiums payable amount and apply the results into the correct spots on your tax forms.
There are many tactics that businesses can deploy to ensure compliance with the CRA such as registering with the GST/HST, keeping accurate records and understanding the filing process. Regardless, sometimes a business is audited by the CRA due to the missed red flags.
So, what actually happens if you get audited? You have two decisions – agree or disagree. If you disagree, you can opt for a note of objection. You can also agree and start preparing for payroll tax audits.
Ultimately, the best option is to audit-proof your business by avoiding revenue discrepancies, keeping a paperwork trail, and declaring all of your income.
Tax season can be a major source of stress for Canadian small business owners—especially if you aren’t an accounting expert. It’s important to understand the different tax brackets and how you can apply deductions to avoid overpaying on your annual income tax.
Understanding what's expected when filing your return and how you can streamline your efforts is also critical. However, that doesn’t mean doing your taxes on paper is any simpler or easier to do.
Using certified tax software can save you time and frustration throughout the year, and especially during tax season. Try QuickBooks today for free to file your taxes seamlessly.
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