Canada | Tax

4 tax tips for your unincorporated business

Are you among the more than 1.5 million Canadians working as an unincorporated business? These expert tips will help you navigate this tax season and beyond.

A Facebook IconFacebook A Twitter IconTwitter A Linkedin IconLinkedin An Email IconEmail

man and woman business owners doing their income taxes for their businessBeing a small business—whether you’re an occasional contractor, a freelance graphic designer or even a rideshare driver—means you begin claiming expenses related to it (Getty Images/kate_sept2004)

If you’re earning income outside of what you do as an employee, you’re considered to be your own business in the eyes of Canada Revenue Agency (CRA). And no business is too small—whether you’re an occasional contractor, a freelance graphic designer or even a rideshare driver. 

Canada has a relatively large group of individuals who operate unincorporated businesses. According to Statistics Canada, there were more than 1.5 million such Canadians in 2014, accounting for nine per cent of total employment. 

“With growth in the gig economy, the number has almost certainly grown since then,” says Bruce Ball, vice-president of tax at CPA Canada.

Running your own business goes beyond simply filling out the T2125, says Brian Ludwig, CPA, of Crown Tax Services in Regina, Sask. He offers four tax filing tips for those new to the business world:

1. KEEP EVERY DOCUMENT

One of the first things Ludwig tells people when they’re in business for themselves, is to make sure to save all documentation that’s related to their business. 

“I even tell people to keep track of all their personal receipts,” Ludwig says. “Because if you get audited, CRA will look at your bank statements and they will assume that every deposit is business income unless you can prove otherwise.

“So even if you receive money from family, but it doesn’t have documentation, CRA is going to make the assumption that you’ve got business income deposited in your bank account. Now they’re not just going to add to your tax return, they can add some penalties and interest as well.”

Similarly, all your withdrawals will be considered personal, unless you have the receipts to back up those claims. Having all the paperwork is imperative to prove your claims. 

How you organize all these documents might depend on the scale of your business. You’re permitted to keep digital copies for tax purposes—while others prefer going the old-fashioned route with paper documents. Ludwig suggests scanning or photocopying any till receipts, as they have a habit of fading away after a few years. 

2. KNOW WHAT YOU CAN CLAIM

Being a small business, even for those on the very small scale, means you begin claiming expenses related to your business. “If you have any personal assets that you start using for business use, that’s where you’re allowed to claim a reasonable percentage use of those assets,” Ludwig says. 

This includes home-office expenses, such as mortgage interest, utilities, property taxes and home insurance; vehicle expenses, such as Capital Cost Allowance, insurance, fuel, parking and maintenance; and even a percentage of meals and entertainment related to your business.

3. SET ASIDE MONEY DURING THE YEAR

Ludwig says the most common mistake by people who are new to business, is that they don’t set money aside for income taxes. 

“People go through the year without saving anything because they’re used to being an employee,” he says. Then come tax time people are surprised they owe $10,000. But if you look at your T4 slips, says Ludwig, you notice that they did take that amount of tax off your paycheque.

“So that can hit people hard if they’re not paying attention.”

4. STAY UP TO DATE WITH SALES TAX REQUIREMENTS

Ludwig also recommends staying current on the GST or HST that you collect. 

“Technically that’s not your money, so it shouldn’t be mingled with your business income,” he says. “If you get behind, [CRA] doesn’t want to hear that you had a bad cash flow month—because that money should never have gone into your operating account to begin with.”

It’s also important to know the rules for collecting sales tax in your province. You might also need to register for a GST or HST account if your business accumulates $30,000 or more in total revenue in the last four consecutive calendar quarters or in any single calendar year.

“Business people can file as late as June 17, 2019 but the taxes are due on April 30,” adds Ball.

MORE TAX FILING TIPS

Don’t let April 30 sneak up on you—mark your calendars for these tax filing deadlines. And don’t forget to do these four things now to make filing your taxes easier.