If you own and operate your own business, it’s crucial to understand what you need to do to stay on side with your taxes. Wondering where to begin? Here are five tax tips to help you out.
1. What are your obligations?
If you’re just starting out, you’ll need to determine whether or not you need a Business Number (BN). Initially, not all businesses need one. The BN is assigned by the Canadian Revenue Agency (CRA) and acts as an identifier for tax purposes. It differs from a Business Identification Number (BIN), which is used by the Ministry of Government Services to identify provincial business registration. A tax professional can help you understand the particulars to determine if you are required to apply for a BN, and the type of business account you should register for – such as the GST/HST or Payroll program accounts.
If you’re self-employed and your business is not incorporated, you must file an individual tax return each year and will have to report your earnings as business or professional income. If you register for a BN, you may be required to file additional information further to your personal T1 return. Learn more about registration requirements here.
2. “I’ll just write it off”
As a self-employed individual you are taxed on your net business/professional income, not your gross income. This presents a tax planning opportunity if you know which expenses you can legally deduct against your gross income. It is also important to understand the types of expenses that you can’t deduct—such as those related to personal use or consumption. You should familiarize yourself with form T2125 and the allowable business expenses. Knowing which expenses are eligible for deduction will help you keep the necessary records.
3. Recordkeeping and Banking
Setting up a system to organize your invoices, bills, receipts, bank statements and government documents makes tax time less of a headache. CRA guidelines state that you’re required to keep records for a minimum of six years, and these must provide sufficient information to determine your tax obligations. You can find more information on record keeping at the CRA’s website.
Having a distinct bank account and credit card for your business helps separate your personal expenses from business expenses. It provides an easy method of keeping track of business revenues and expenses throughout the year, which can help you estimate and plan for the tax you are likely to owe at the end of the year.
4. Installments and Paying Your Final Tax Bill
If you are self-employed, the deadline for filing your return is June 15th but you still need to pay any tax owing by April 30th. Taxes are either remitted throughout the year through installment payments, or at the end of the year with your annual income tax return.
If your tax liability is more than $3,000 in the current year, and in either of the previous two years, you will be required to make installment payments. As a self-employed individual you don’t have an employer withholding and remitting income tax on every paycheque, so you should plan accordingly by saving throughout the year.
If your revenues and expenses have not changed significantly year-over-year, refer to what you’ve paid in previous years for a good indication of what you’ll owe this year. If you include your tax liability in your business budgeting process, you can set aside the funds ahead of time to pay the bill.
5. Professional Help
Staying on top of the various tax requirements related to a self-employed or small business filing can take valuable time away from growing your business. A tax professional can take the anxiety out of tax time, and advise you on all aspects of your personal and business tax obligations throughout the year. This can ensure you are on the right track and not overlooking anything important.
Matthew Sears, T.E. Wealth
This article was published in T.E. Wealth’s Strategies newsletter, Nov 2016 edition. Read the full edition here.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.