Photo credit: Canadian taxes. Stock photo by Getty Images
There are many considerations that go into paying taxes when you’re a sole proprietor. What is your year-end date for taxes? What exactly do you have to pay?
First of all, you must report your income on a calendar basis and that means a December year-end. There is an alternative method by which you can report income on a business-to-business basis and it allows you to choose another date for the year-end. However, it only applies to individuals and partnerships where all the partners are individuals.
As a sole proprietor of your business, you are responsible for decision making, receiving profits and claiming losses. Remember, you have no separate status from your business and therefore assume personal liability, which includes assuming responsibility and liability for filing taxes.
Basically, you are responsible for filing three types of taxes for your business:
Personal income taxes: you have to file a T1 income tax and benefit return. On this form, pay taxes through reporting income and losses. That income, and if there is any loss, makes up part of your overall income for the year.
It’s rare that the T1 return doesn’t have to be filed, but the Canada Revenue Agency set out specific guidelines that you have to file the T1 return if you:
- Have to pay tax for the year;
- Disposed of a capital property or had a taxable capital gain in the year;
- Have to make a Canada Pension Plan or Quebec Pension plan payments on self-employed earnings or pensionable earnings for the year;
- Want or need to get employment insurance special benefits for self-employed people;
- Received a demand from the Canada Revenue Agency to file a return.
Also note: you have to file a return if you want to receive your income tax refund, a refundable credit, a GST/HST credit, or the child tax benefit. You could also be eligible to get some benefits or credits from your provincial tax agency.
Payroll taxes (if you have employees): if you have one or more employees, you must file payroll taxes and you have additional tax and documentation to file.
Goods and services taxes/harmonized sales tax (GST/HST): if you make $30,000 annually and you provide taxable supplies in Canada, you are responsible for paying these taxes. You have to register for a GST/HST number with the government and ensure that you file the return within the proper reporting period. The usual filing date for persons with a fiscal yearend of December 31 and for the purpose of income tax is June 15.
Make sure you keep good records for tax purposes. You have to keep all receipts that relate to the business and all receipts that you are claiming for tax purposes. If you claim these expenses and CRA asks you to produce these receipts at a later time, you have to be able to produce them, or you could be liable for paying back taxes for things you claimed, but for which you cannot provide receipts. Also make sure to keep any and all invoices, whether for purchase or sale, as well as vouchers, banking information and any contract that concerns your business.