How To Prepare for a Pain-Free Tax Season
Running a small business can be equal parts exciting and overwhelming. Exciting because you are building the business (and life) of your dreams and overwhelming because there are sooo many moving parts. You are the marketing, sales, finance, everything department and in all cases YOU are on the hook.
Of all the business activities out there tax preparation probably wins the procrastination award. The business owners we speak with feel like they are in the dark when it comes to preparing for tax season. Oftentimes they are left wondering if they are “doing it right” and that fear of the unknown keeps them from facing their finances. It’s kind of like the monster in the closet when you were a kid- those shapes only look like scary creatures when the light is off. As soon as you turn on the light you realize it’s really your winter coats and some sports equipment…
So, today we are going to shine a light straight at the tax monster and show you that with a little preparation and knowledge, tax season does not need to be scary. In fact, facing it straight on can be empowering!
What we will cover:
- When should I file my taxes as a sole proprietor?
- What can I write off on my Canadian sole proprietor tax return?
- How do I calculate my business use of home office?
- What information do I need to have on hand for my tax return?
Let’s dive in!
When should I file my taxes as a Canadian sole proprietor
As a sole proprietor, your income taxes for your business are filed with your personal tax return each year. Your business activity is reported on a schedule called T2125 with your personal income taxes. Below are the Canadian filing and payment schedules. We recommend that you pop these dates into your calendar.
The key filing and payment dates are:
March 15th: Installment deadline
April 30th: Final balance deadline
June 15th: Installment deadline and filing deadline
Sept. 15th: Installment deadline
Dec. 15th: Installment deadline
A couple of additional notes…
Installments may be due if your total taxes owing will be more than $3000 CAD. In Quebec the amount is $1800. Your CRA MyAccount will have installment reminders. If a deadline falls on a weekend or holiday the due date is the next business day, but we don’t recommend leaving it to the last minute.
What can I write off on my Canadian sole proprietor tax return?
There is a lot of misinformation about write-offs out there. The perception is that you can write anything off if you are running a business and that’s just not the case. We’ve heard it all- from writing off outfits to home decor. Be cautious where you get advice or ‘tips’ on write-offs. Just because a fellow business owner told you it was a-ok doesn’t mean it actually is.
A business deduction (a.k.a. write-off) is defined as expenses you incur to earn income from your business activities. In the eyes of the CRA, incur means you have paid or will pay the expense. The amount you can deduct in a given year for any expense, depends if it is considered a current year expense or a capital expense.
Some common expenses are: advertising, insurance, business memberships, rent, office expenses, salaries and wages, professional fees.
How do I calculate my business use of home office?
These days almost everyone has a home office- COVID made sure of that. One of the most common questions we get is how to calculate the amount for tax purposes. You can write-off a portion of your personal home for your business only if it meets these conditions: the workplace in your home is your principal place of business or you use the workspace in your home exclusively for business purposes and use it regularly to meet with clients, customers or patients. In order to calculate the amount you will need to divide the total square footage of your home by the total square footage of your home office. You may need to pro-rate further if it is not a dedicated business space.
Once you have your number or percentage you can then write off expenses such as rent/ mortgage, utilities, property taxes and even some maintenance to the space. Time to get out that tape measure!
What information do I need to have on hand for my tax return?
To file your Canadian sole proprietorship tax return your will need:
- Summary of all your revenue in the calendar year. This includes revenue from all sources coming into your business.
- Breakdown of all expenses categorized by the common write-off categories. You will need to make sure you have ‘proof’ (read receipts) for all your claimed expenses.
- The business use of home office.
- Business use of your personally owned vehicle. This is probably one of the most underutilized write-offs, but it can really add up. You will need to have on hand the total kilometers driven and the total kilometers driven for business. Once you have this calculation you can deduct things like gas, insurance, lease payments etc...
- Purchase and sale information for capital assets. Capital assets are business assets with a lifetime of more than one year. For example a computer, specialized furniture (eg. massage table).
The bottom line
With a little organization you can have a stress- free tax season even if it’s your first time around. Getting into the habit of keeping track of your business expenses can take some time, especially if it’s something you shy away from doing. Make it easy for yourself by breaking it down into smaller chunks and scheduling it in. We recommend not waiting until the last minute to begin gathering important info. Pro tip: Setting up a monthly meeting with your money is a great way to establish a routine around business finances.
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Hi! We’re Ashli + Martina- the CPAs, moms and small business owners behind GrowCPA. We are on a mission to help entrepreneurs take the “ick” out of all things tax and business finance.
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Wishing you success in your business,
- Martina + Ashli
Date published: February 1, 2022
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.
