Every year all Canadians must file their income tax return. The same goes for every business. If you own and operate a small business you must also file a small business income tax return. The major difference between a business and an individual income is that a business can deduct expenses made to earn money. An individual cannot. This blog gives you some of the most popular deductions used on small business income tax return in Canada. If you are writing your own report, get information from a friend accountant or read thoroughly the guide provided by your Country or your local jurisdiction.
Canadian Revenue Agency (CRA)
The Canadian Revenue Agency is the Canadian Federal Government body that receives the income tax and also the tax on products and services.
Important dates
Business years can start on other dates than January 1. Often large corporations end their fiscal year on Mar 31. Income tax returns must be filed and submitted with the six-month period following the end of the business fiscal year. That is also when the payment must be sent to CRA. Individuals must file their income tax report before April 30.
Installments. When a business declares an income and owes more than $3 000 in tax, the CRA may require installment payments. Large companies pay monthly installments. Small businesses and individual may pay quarterly installments. When the business or individual’s payment is less than $3 000, it is due on the last day of the six-month period or on April 30th for individuals. CRA will charge interest on any late or unpaid income tax.
Small business
The CRA considers a business as a small business when its net income is $500 000 or less. There are other factors but this one is easy to figure out. These businesses are often sole proprietorship (owned by one individual) or partnership (owned by two or more individuals).
Proprietorship. You can choose a business name or operate under your own name. You are responsible for all income and losses. You might need to register for Goods and Service Tax (GST) or Harmonized Sales Tax (HST) depending on the province where you conduct your business and if your business provides taxable goods or services. You will be filing your report under your personal income tax report. The business part of the income is reported in the attachments to the report. You can find the details in Chapter 2 of the Guide for Canadian Small Businesses by clicking here. You will find similar guides for your Country on the web.
Partnership. A business partnership exists when two or more individuals run a business. For example, you and your spouse are running a Bed & Breakfast (B&B) business. The association may be verbal or in writing. The partners share the income and the losses. Each partner files a personal income tax report including their share of the business (often 50%).
Both types of businesses above are usually not incorporated.
Corporation. A corporation is a registered business with a name and a unique business number (BN). Owners of proprietorship or partnership businesses are totally responsible for their business income and losses and their personal assets may be in jeopardy. A corporation is an entity independent from the owners. The corporation is responsible for income and loss, not the owners.
Business expenses
Here are some examples of business expenses. They are admissible if the costs are used to earn money for the business. They cannot include personal expenses.
- Internet (the portion you use for the business)
- Cable (the portion you used for the business – this was admissible when we ran a B&B business)
- Phone (portion used for business)
- Car expenses (see below)
- Marketing
- Training
- Professional services
- Office expenses
- Office supplies
- Business permit
Car expenses. To claim car expenses, you must determine how much of the car you use for the business. This is calculated using the kilometers driven. Keep a book in your car to note all the following information. You will need this to file your small business income tax return.
1. On January 1st, read the odometer. This is the year start kilometers.
2. Every time you use the car, write the date, the starting kilometers and the end kilometers. Note the reasonwhy you took the car.
3. Every time you fill up the car, write the date, the kilometers, the amount of fuel and the price.
4. Every time you maintain the car, write the date, the kilometers, the price and the reason for the maintenance or repair.
5. On December 31, read the odometer. This is the year-end kilometers.
You will need to add all the mileage you drove for the business and calculate the percentages for personal and business uses. You must keep this information to file your income tax.
Example:
- Odometer on Jan 1 = 1000
- Odometer on Dec 31 = 21000
- Total of all trips driven for the business = 7000
- Percentage = 7000/(21000-1000) = .35 x 100 = 35%
Business portion of car expenses. Your book must also contain the following information. Keep all your receipts for gas and maintenance. You will be need to multiply each of these numbers by the percentage and claim the portion of the expenses used for the business. If you bought the car for business, you will be claiming 100% of the expenses. You must declare it as a CCA (see below in the home use).
- Interest on car payments (get this number from your lender – dealer or bank)
- Maintenance
- Fuel
Business use of home expenses
If you work at home, you need to define an area where you perform work activities. You can deduct work space expenses if:
- You use that space as the principal working place
- You use it only for earning your business income
You must calculate the portion of your home you use for the business. We use one room in our home for a customer service business for a larger company. We measured the surface of this room and the surface of the entire house using the real estate method. Express the portion as a percentage of the home surface.
- Home size is measured outside
- Room size is measured inside
- Garage space is not included
- Any unfinished surface is not to be included
Admissible deductions:
- Heat (when not included in electricity)
- Electricity
- Insurance
- Maintenance
- Mortgage interest
- Property taxes
- Other expenses
- Capital Cost Allowance (computer and computer software, small tools, vehicle if purchased for the business)
You can carry forward the business use of home expenses to the next year if the business income is lower than the total expenses.
Your total deduction cannot be higher than the business income.
Conclusion
I have been filing my own tax returns since I my first job many decades ago. When I started our B&B business, I began using a tool on the web. UFile is user-friendly and keeps the previous years data so I do not need to start entirely from scratch. If you have been hiring an income tax filing service, you might want to look at the resulting report and ask questions. This post contains many of the expenses I use on my return. Your list will be different. Read the guides supplied by the Government and the online tool you want to use. They contain all the information you need and read them every year because income tax laws change and you must keep abreast.
If you have questions about small business income tax return discussed here or have comments, please use the comment area below. I will get back to you with answers and references.
– Nicole