Business Income

Filing Taxes as a Small Business Owner

Along with the responsibility and rewards of being your own boss, becoming a small business owner means that the way you file your tax return also changes. Don’t worry – filing your taxes as a small business owner is easier than you think once you know the basics!

Am I Really a Small Business Owner?

When you think of the term “small business” what comes to mind? Is it a small mom & pop store? Or the little deli on the corner that sells those amazing wraps? Being a small business owner doesn’t require a store-front or employees. If you’re self-employed in any capacity, you’re a small business owner (Yes, this means you freelancers and ride-share drivers). Whether you’re a contract writer, do dog walking as a side gig, or sell your veggies at the local farmer’s market, congratulations! You’re a small business owner.

Your Business Structure Makes a Difference

Most small businesses start off as sole proprietorships. While it may sound like you’re selling shoes, being a sole proprietor simply means you run your business by yourself and haven’t incorporated it. As a sole proprietor, the details about your business are included on your own personal tax return. Any profit you make is added to your income. When you prepare your tax return, you’ll just enter all of your business’s details (income and expenses) in the self-employed section. When you’re finished, you’ll have a complete T2125 Statement of Business Activities. This form is sent to the Canada Revenue Agency along with all the other “usual” tax forms. Quebec residents record the same information on Form TP-80-V.

If you own your unincorporated business with a partner(or partners), the same T2125 is filled out. Just a bit of extra info about the partners themselves is needed.

On the other hand, if you’ve chosen to incorporate your business, you’ll file a separate return (Form T2) for the business itself. All of your personal income and credits stay on your return and the business’s income and credits stay on its own return.

Choosing your business’s structure is an important decision. Incorporating has its advantages and disadvantages. To learn more about choosing a business structure, check out our tax tip Taking the Leap from Employee to Owner.

Keep Consistent Records

Whether your small business venture is just a few hours a month or your full-time gig, good recordkeeping is essential. Try to set aside time regularly to organize your receipts and track your income. Label expense receipts as you file them away.  Sign up for e-billing for utilities if you’re claiming home office expenses. Keep a log book for business mileage. To make recordkeeping even simpler, consider using business software or apps.

Preparing Your Tax Return

The self-employment section of your return is made up of three parts

1. Identification

All the general details about your business including the

  • Business name and address. If your business doesn’t have an “official” name, you can use your own name. Same goes if your business is home-based – just use your home address.
  • Industry code for your business. The industry code for your business is used by Stats Canada to keep track of how many business are in a particular field. Finding your industry code is quite easy. There’s a full list on the CRA’s Industry codes web page.
  • Information on partners or co-owners.
  • Fiscal period for your business. Most small business owners use the calendar year as their fiscal year.

2. Business Income

Your business’s income is exactly what it seems. It’s the income you’ve earned by selling products, performing a service, etc. 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.

3. Business Expenses

It takes money to make money right? You’ve likely shelled out a bit of cash to run your business. Common expenses include supplies, advertising, meals and office supplies. 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. Not only are you subtracting your costs from your income (which means less tax due), recording all of your expenses allows you to see the most accurate picture of your business’s health. 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.

Small Business Tax Myths

  1. My business didn’t make any money so I don’t have to report anything right? False. Many businesses don’t see a profit in the first year (or more). You’re still required to include details of your business on your tax return. And, if your business actually lost money, you can apply the loss to your other income.
  2. I made less than $5000 so I don’t have to file. Again not the case. 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 on your tax return.
  3. I’m a student so the money I make is tax-free. Sorry – no. 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.

References & Resources

Canada Revenue Agency: Sole proprietorships and partnerships

TurboTax FAQ: What is a business?