business Preparing tax returns at the end of the year is often complex, and this is even more so if you are the sole owner of a business. Self-employment represents an opportunity for paid work in addition to a salaried position, or the possibility of starting a business without incorporating it.
Indeed, market entry and exit costs are lower for unincorporated businesses, which form a significant part of the Canadian economy. In the 2017 tax year, approximately 3.1 million taxpayers reported some form of self-employment income.
Here are four tax tips to make filing your unincorporated business tax return easier.
1) USE THE RIGHT FORM
Income from the business is subject to personal tax rates and reported on the owner ‘s personal income tax return.
“To simplify the process, complete form T2125 (Statement of the results of the activities of a business or a liberal profession ) and send it with your T1 return, after having checked the correspondence of the final amounts entered”, advises James Cleaveley , CPA, Director of Taxation at LiveCA, the very first virtual accounting firm in Canada. Using other forms would only complicate things unnecessarily, according to the expert.
2) TRACK YOUR BUSINESS EXPENSES
Trying to remember expenses months later or neglecting to review bank statements regularly is the best way to forget. Cleaveley recommends checking your documents monthly to keep your records up to date. Better yet, use a separate bank account for your business and a credit card for your business expenses to keep track of all money coming in and going out.
Cleaveley also recommends keeping all your receipts and other documents in a safe place, in case the Canada Revenue Agency (CRA) asks to review your records. “Often, in tax return review cases , the additional tax owing is due to incomplete records and lack of receipts. » In addition to keeping your receipts, write down why this expense was necessary for your business. Your notes will serve as a memory aid if you need to justify your expenses later.
3) REQUEST A DEDUCTION FOR OFFICE EXPENSES
Many entrepreneurs who have not incorporated work from home and can, under certain conditions, claim a deduction for office expenses. Bruce Ball, FCPA, Vice President, Taxation, CPA Canada, explains the two requirements: “First, it must be your principal place of business. Second, your office must be used exclusively for earning business income and meeting clients or patients on a regular and ongoing basis. »
For start-ups or those that have had a bad year, Mr. Cleaveley points out that it is possible to “claim a deduction for home office expenses until net income is zero, but not to increase a loss. Unused expenses can, however, be carried over to the following year.
4) PLAN ADDITIONAL PAYMENTS
Unlike the periodic payroll of employees, the payroll of sole proprietors is not subject to any tax deduction. This is how many people find themselves in difficulty.
Depending on where you live and your net income, this may be the case . If you reside in Quebec on December 31 of the tax year, the net federal tax threshold payable is set at $1,800. Elsewhere in the country, it is $3,000.
For residents of Quebec, provincial installments may also be required. To avoid tax debt, Ball advises using a separate business account and, if you’re transferring funds for personal use, be sure to leave enough money there to cover quarterly installments or tax balance to be paid when you file your return. Installment payments are due on the 15th day of March, June, September and December .
The CRA sends installment reminders to taxpayers who must pay them. If you pay the amounts recommended by the CRA, you will not have to pay interest.
RESOURCES ON TAX RETURNS
Learn the essentials of an incorporated business tax return . Also, see what action to take if you find that you forgot something in your return after filing it. You can also stay on top of recent tax and COVID-19 news and gain fresh insights by reading our tax blog.