A Guide To Tax Season For Small Business Owners

A Guide To Tax Season For Small Business Owners

It’s that time of year again – everyone is talking taxes and it’s at the top of your mind even though you’ve been trying to avoid it all year. Besides just getting your taxes filed to avoid scary calls from the CRA and those hefty penalties and interest – tax season is a great opportunity to get a clear picture of your company’s financial health.

Money is the bloodline of your business so it’s important to have a finger on the pulse of your finances and not be afraid of it.

To make it just a little easier for you and in hopes that you can use tax season as an opportunity to understand where all your hard earned money is going, here is a guide with some quick tips and helpful information that might make this season a little easier and more informative for you!

Get Your Financial Books in Order

If you’re one of those people who have meticulously organized and tracked your business finances (i.e. income and expenses) throughout the year then you’re ahead of the game.

However, if you’ve been putting off dealing with your business finances all year, then now is the time to sit down and get organized!

If you’re a sole proprietor, using a tool like Microsoft Excel is a cost-effective and simple tool to track all your income and expenses. Alternatively, a more robust option is to use cloud-based accounting software such as Xero. There are other great cloud-based solutions such as Receipt Bank or Hubdoc that can really help you get your receipts and invoices organized. These are also great tools to store all your supporting documents, in the event of a CRA audit/review. You wouldn’t want to pass over receipts that have completely faded, in which case, they might disallow your expenses!

If you just don’t have the time to get your books in order and you have room in your budget, consider hiring a qualified bookkeeper to help you. Having clean and organized books will also help reduce your cost to file taxes (if you’re paying an accountant to file for you).

Pro Tip: Keep your detailed and itemized receipts for everything! Bank statements do not count as supporting documents for expense claims.

Don’t Miss The Deadlines for Filing Income Tax Returns

Small businesses that are operating as a sole proprietorship or partnership will have until June 15th to file their taxes. However, it’s important to note that any income taxes owing are due by April 30th. If you file late and end up owing taxes, you’ll pay interest and penalties on your outstanding tax balance until you submit your payment to the CRA. Keep your money in your pockets!

Small Business Tax Myths

1. My business did not make any money so I don’t need to report anything on my tax return.

False. Even if you had a net loss for the year (i.e. more expenses than income), you are still required to report your business income and expenses on your tax return. Moreover, it’s actually beneficial for you to report that net loss as you can apply the loss to other sources of income, such as employment income or investment income. If you can’t use those business losses in the current year, you can carry them back for three years and recover taxes previously paid or carry them forward for 20 years, to offset future earnings.

2. I made less than a thousand dollars and it’s just a hobby so I don’t have to report that income.

False. Even if you only made $10, you are required to report that income to the CRA. The CRA does not determine what is and what isn’t a business by how much money you make or by your intentions to “run a business”. They define a business as “any activity that you do for profit”.

Review the Financial Health of Your Business

Once your business finances are in order after filing your taxes, this is a great time for you to review the financial health of your business, see how you performed in the past year, and set financial goals for the year ahead. Did you make money or did you spend way more than you brought in? Was there an area where you spent way more than you expected? Where can you streamline costs and cutback on expenses?

Most business owners think that racking up tax deductions is great as it reduces your taxable income. However, you are still running a business and the goal is that your business will make money. Reducing unnecessary expenses also means there is more cash in your pockets and less outflow of money. Paying taxes is not a bad thing. It means that you are running a profitable business!

Consider this:

Scenario 1 –

  • If you made $1000 of income and spent $500 on expenses. You will only get taxed on $500. The taxes you would have to pay to the CRA would be approximately $125.
  • Amount of money left in your pocket at the end of the year = $375 ($1000 of  income minus $500 of expenses and $125 of taxes).

Scenario 2 –

  • However, if you made $1000 of income and spent only $200 on expenses. You will get taxed on $800. The taxes you would have to pay to the CRA would be approximately $200.
  • Amount of money left in your pocket at the end of the year = $600 ($1000 of  income minus $200 of expenses and $200 of taxes).
  • You are still better off at the end of the year, if you managed your expenses and spent less money on things just for the sake of a “tax write off”.

GST/HST – Do I need it? How do I remit it?

The GST/HST (Goods and Services Tax/Harmonized Sales Tax) are sales taxes that Canadian businesses must collect and remit to the government. With some exceptions, all businesses are responsible for paying applicable taxes at the federal and provincial level in the form of the Federal GST (Goods and Services Tax) and the Harmonized Sales Tax. In order to account for and remit these taxes, you must register your business for a GST/HST account.

Certain products and services are exempt from these taxes. Livestock and feminine hygiene products are both exceptions, for example, along with services like residential housing, health care and dentistry, certain child care services, and many educational services. Businesses don’t have to charge sales tax on these items or remit them to the Canadian government via the GST/HST Registry. Also, “small suppliers,” or those that earn less than $30,000 in a calendar quarter or over the last four consecutive calendar quarters.

Non-resident businesses without a permanent establishment and that don’t engage in any business in Canada don’t have to register for or pay this tax. Also, certain groups of people are exempt from being charged GST/HST, such as Indigenous peoples, and provincial and territorial governments.

How do you register for the GST/HST?

Once you determine you must start collecting and remitting this sales tax, you can begin the registration process on the Canada Revenue Agency (CRA) website.

Before registering

Before you start the process of registering for a GST/HST account, you need to have some information handy:

Effective date of registration

Your effective date of registration is usually the day you stop being a small supplier. It could also be an earlier date.

Your fiscal year

Typically your fiscal business year for the GST/HST is the same as your tax year for income tax purposes. Generally, the tax year for the following “persons” is a calendar year:

  • Individuals and certain trusts
  • Professional corporations that are members of a partnership (such as a corporation that is the professional practice of an accountant, a lawyer, or a doctor)
  • Partnerships, where at least one member of the partnership is an individual, a professional corporation, or another affected partnership

Some persons use non-calendar tax years. If this is the case, you may choose the same year as your GST/HST fiscal year. Corporations use the same fiscal year for both income tax purposes and GST/HST purposes. However, if a corporation has a non-calendar tax year for income tax purposes, it can use a calendar year for its GST/HST fiscal year.

Total annual revenue

To calculate your total annual revenue, include revenues from your taxable sales, leases, and other supplies, including zero-rated supplies (0% tax rate) as well as taxable supplies of all your associates. If you are a new business without revenues, you can give the CRA an estimate of your income for the year.

Basic information

You’ll need to provide personal information:

  • Social insurance number (SIN)
  • Date of birth
  • Personal postal code (where you live)

You’ll need to provide your business information:

  • Business name
  • Business number* (if the business already has one)
  • Type of business or organization (such as sole proprietor, partnership, corporation, registered charity)
  • Name and SIN of all owners
  • Physical address
  • Mailing address (if different from the physical address)
  • Description of major business activity

*Note: It’s important to know that your GST/HST account number is part of a business number (BN). If you don’t have a BN yet, you will receive one when registering for your GST/HST account.

Ways to register for your GST/HST account

The CRA allows you to register in a few different ways:

  • Online
  • By mail or by fax
  • By telephone

What do you do after confirming your GST/HST account number?

You will receive a GST/HST account number to confirm that your registration is complete. You can access this number on the “My Business Account“ section of the CRA website. In your account, you can manage your program accounts online and see your GST/HST information.

Once you receive your number, you’re required to start remitting the sales tax you collect to the Canadian government.

Charge and collect the GST/HST

In essence, the tax rate to charge depends on the place of supply or where you make your sale, lease, or other supply. The rate for other taxable supplies depends on the province or territory. The current rates are:

  • 5% (GST) in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon
  • 13% (HST) in Ontario
  • 15% (HST) in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island

The rules around charging and collecting sales tax can get somewhat complicated, especially if you do business and make sales across several provinces and territories in Canada. If possible, use accounting software or the help of a financial professional to ensure you are in compliance with the requirements for federal sales taxes.

Complete and file a GST/HST return

The personalized GST/HST return (Form GST34-2) has your filing due date at the top of the form. The due date of your return is determined by your reporting period.

The CRA will charge penalties and interest on monies not paid and returns not filed by the due date. Even if you don’t have any business transactions or taxes to pay, you must still file a GST/HST return.

Remit sales tax

Your payment is due at the same time as your GST/HST returns.

Why should I register for the GST/HST?

If you sell products and services in Canada, it’s something that you cannot avoid. If you’ve reached the revenue threshold and don’t remit the applicable sales tax, you could face financial penalties.

One part of financial health includes remaining solvent to the best of your ability—which includes paying your tax obligations on time and as agreed. Taxes are one of those liabilities that can negatively impact your business if not handled properly.

Registering for the GST/HST, charging, collecting, filing and remitting sales tax will ensure you are following the law and setting yourself up for financial success on both a personal and business level.