4 Things every Canadian Sole Proprietor needs to know about Taxes
Oh taxes, what are they good for anyway? Well truth be told, a lot. It's a privilege to be earning enough money in your entrepreneurial journey to have to pay them. However, that still doesn't make the process of understanding and preparing your taxes any fun. We empathize with you there! We've got 4 essentials to share to kick start your tax learning journey.
1. What does it mean to be a Sole Proprietor In Canada?
In Canada, the two most common legal statuses for businesses are; a sole proprietorship or a corporation. As a sole proprietorship by definition your business is unincorporated. It would only have one owner (you!) and you pay personal income taxes on all profits, claim all losses and are legally indistinguishable from your business. If you’re a sole proprietor you have to ensure you’re charging the right sales taxes and taking part in the deductions that you’re eligible to claim.
This is not to say that you have to stay a sole proprietor, you’re not bound to one type of legal status forever. Your business can grow and you can always incorporate down the road. The key is knowing your status now and understanding what it means to be a sole proprietor. This will help you set yourself up for financial obligations you have currently and what your business could look like in the future. We cover incorporation in our course Solopreneur Tax Academy.
2. Federal Sales Tax - HST/HST
Federal sales tax in Canada is complex, there is no denying it. In simplified language, sales tax is a flow through tax. You are charging your customers for ‘consuming’ your goods or services and then passing that money onto the government. It never belongs to you, it belongs to the Federal Government.
In Canada, it is a bit more nuanced than just charging sales tax. One of the first questions to ask yourself is have you surpassed the small supplier threshold? If not then you may not be required to charge sales tax as of yet. Once your world-wide taxable supplies surpasses $30,000 in the trailing 4 quarters or less, then you are no longer a small supplier. WOW that was a meaty sentence, but unfortunately that’s the definition! Once you are no longer a small supplier you need to register by the required deadline which can vary based on how quickly you surpassed the threshold.
Location matters too, when it comes to your goods or services you need to ascertain based on your recipient location/address what rate you need to be charging. In Canada, GST/HST varies by province, and when your recipient is outside of Canada it changes again.
This might seem like quite a bit to take in, our course will break down all of the above and possibly even save you hundreds of dollars with strategic registration. The most important rule to know about sales tax is to be informed and have a plan to conquer it, like using an app like Quaderno to help you calculate this. Knowledge is key here! These apps aren’t fool proof, you need to know how to set them up based on the rules to have them calculate the rates properly for you.
3. Track your business expenses
As a sole proprietor in Canada, you are in a great position to save taxes by deducting business expenses to determine your taxable net income. Some types of expenses might seem small but adding up everything you are eligible to claim can leave you with some mighty tax savings! The Solopreneur Tax Academy will go in-depth on all common expenses your business can take as well as what deductions the CRA says is a no-go. For now, let's look at two expenses we often get asked about.
If your office is your home then you may be in massive luck! Canada Revenue Agency lets you expense a portion of things like your mortgage interest, utilities and repairs/maintenance to name a few. You have to meet 1 of 2 conditions in order to qualify.
Meals & Entertainment:
Traveling or meeting clients often? (well likely not as often #goawayCOVID-19). Generally though, there are many ways in which you might have to purchase meals or entertainment in your business . By keeping a receipt of your business lunches or events you are eligible to deduct 50% of the expense. There are few key reason you can deduct 100% of your meals and entertainment too which we go deeper into in the course.
4. Don’t Stress!
Easier said than done but tax time doesn’t have to be horrible. Reading this you’ve already started the number one rule to avoid stress: educate yourself. If you start from day one with the proper tax documentation and records you’re already setting yourself up for success. Our course will go deeper on these topics (and more) to make sure you’re not only equipped with knowledge but actionable templates and worksheets as well.
Let's reframe your thought process on taxes, make the journey easier on yourself and get started now! It’s never too early to be successful.