Tax can be a worrisome topic when it comes to small businesses, particularly those who are relatively new to the game. To help take some of the mystery out of business and tax planning, we have answered the 6 questions most commonly asked by small businesses:
Does Every Business File the Same Taxes?
No. How you file your taxes depends on the legal structure of your business. For example, a sole proprietor will file both personal and business activity together on their annual personal income tax return (T1), while an incorporated business files an annual corporate income tax return (T2) for business activity only, and files their personal taxes on a separate T1 form.
Do I Need a Business Number?
Yes. If you are incorporated, you will require a business number to file a corporate tax return, HST return, and payroll (assuming you are an HST registrant and have employees). If you are a sole proprietorship, you will also require a business number for your business, HST registration, and payroll (based upon the above assumptions).
How Much Income Goes to Taxes?
This varies depending upon your legal structure and income level. This is where business and tax planning can save you a considerable amount of money. Personal income tax is determined based on four marginal tax brackets, ranging from 20% to 53%. Income tax for an incorporated small business is only 15% on the first $500,000 of taxable income (and 26.50% thereafter).
To learn more about which legal structure would minimize your overall taxes, contact us.
If I Use My Car or Work from Home, Can I Claim My Mortgage or Car Expenses?
Yes. You can deduct a percentage of the interest on your mortgage, based upon how much square footage of your home is taken up by your workspace (or based on the number of rooms in your home, assuming your ‘home office’ is one of them).
Deductible car expenses are based upon mileage (kms), but can only be claimed if the mileage is logged in detail, with odometer readings before and after the taxable year. The amount you can claim is based upon how much mileage was used for business purposes, multiplied by an authorized CRA per-kilometer rate (approximately $0.50/km).
Caution: Do not claim 100% of your home or personal auto expenses. This is commonly viewed as a red flag by the CRA, and will very often lead to an audit.
Do I Need to Make Canada Pension Plan (CPP) Contributions If I’m a Sole Proprietor?
Yes. An unincorporated business that generates more than $3,500 in profit will be required to pay double the amount of CPP contribution for which an employee would be responsible. Essentially, the sole proprietor is responsible for contributing to their CPP as both an employer and an employee on their personal tax return.
If your business is incorporated, your corporation will be responsible for remitting both the employee/employer portions of CPP to CRA (assuming it has employees).
What Happens if my Business Experiences Losses?
Annual business losses can be applied against taxable income to reduce your taxes owed or generate a refund. Business losses can be applied against earnings for up to three years in the past, or applied to earnings up to twenty years into the future.
The Road to Growth
Fuller Landau has a full suite of small business accounting, tax, and related services to arm your business with the tools to grow. For more information on small business accounting and tax services, please contact us today.