Your ultimate guide to fearless filing

A set of three plants in different sizes and colours.

Year end can be pretty stressful, especially for a new business owner. There’s a lot of information out there, and you can easily get lost in a sea of links and foreign terms.

We combed through tons of resources to put together an easy guide for first-time filers, as well as anyone looking to better understand what their accountant is saying. Check out these three common scenarios to understand how to prepare for year end and keep your accountant happy.

Scenario #1: Sole proprietor or side hustler with no employees

Lucy brings in about $20,000 as a part-time graphic designer. She’s about to file her business taxes for the first time, so she’s working with an accountant to help her figure out how to file and what she can write off.

Filing taxes as a sole proprietor

Lucy learns that she has a sole proprietorship, meaning she’s the only owner and her business isn’t incorporated. It’s important to know the difference because the rules for filing taxes are completely different. Sole proprietors report business income and tax deductions right on Form T2125 (Statement of Business or Professional Activities) of their personal T1 income tax returns. This means Lucy’s business tax rates are the same as her personal tax rates.

Sole proprietors who make over $30,000 in either four consecutive quarters or within one quarter need to consider GST/HST when filing, and they have to register for a GST/HST number. Those making less than $30,000 don’t have to, but they can do it voluntarily if they want to claim tax credits on the business goods and services they’ve bought.

Benefits for sole proprietors

Lucy will claim her business expenses in three different parts on her T2125 form. First, she’ll record her direct business expenses (money spent that specifically relates to the business). She doesn’t have a lot of direct expenses, other than some advertising on Facebook this year. She can also claim the hosting fees for her website, and her tickets and flights to the design conference she attended earlier in the year.

The second part is for home expenses, since she runs her business out of her home. Lucy’s accountant told her she could deduct part of her house expenses since she works from her home office. They calculate that she can deduct 25% of yearly expenses like rent and insurance.

The third part is business assets that lose value over time, known as depreciable property expenses. Lucy’s accountant says she can also claim deductions on these expenses as part of the Capital Cost Allowance. In Lucy’s case, this means the new laptop she bought last month.

Pro tips for sole proprietors:

  • Try to forecast your income and expenses based on the last year, and estimate how much you’ll owe in taxes using an online calculator.
  • Have a plan in place to save each month for the taxes you’ll owe at the end of the year so that it doesn’t become an unexpected expense that derails your business or personal finances.
  • Set up a system to manage your receipts, bookkeeping, and tax payments, so that you have accurate records ready when tax time comes around again.
  • You’ve got until June 15th to file your income tax as a sole proprietor, but your balance owing is due April 30th. If you aren’t paid up by then, interest will be charged.
  •  All tax codes have loopholes and exceptions, so it’s important to talk to a tax professional about what deductions apply to your personal situation.

Scenario #2: Incorporated self-employed owner with no employees

Roger is a full-time, self-employed psychologist earning $375,000 a year. He was running his business for a few years as a sole proprietor, but recently incorporated to save money on taxes, and to shift liability away from himself and onto the corporation.

Roger now runs a Canadian-controlled private corporation (CCPC), which means the game has changed for him when it comes to filing taxes. He now needs to fill out a separate T2 form for his corporation. In exchange for lower tax rates and less personal liability, he has to do a bit more strategic planning this time around. He’s working with a tax expert to find out how to maximize the benefits he gained from incorporating.

Filing taxes as a CCPC owner

As a sole proprietor, Roger’s income was taxed at his personal rate, which is steep because of his high income. Now, he’ll enjoy a much lower tax rate on the first $500,000 of his earnings. Rates for CCPCs range from 10.5% to 18%, depending on the province.

It’s important to keep in mind that this isn’t really a tax savings; the taxes are actually being deferred. When Roger eventually takes that money out of the corporation through a salary, bonus or dividends, he’ll pay the personal tax rate on those earnings. The longer he leaves the money in the company, the more the assets grow.

Benefits for CCPC owners

An advantage for Roger is that if he decides to sell his business down the road, he’s eligible for a lifetime capital-gains exemption (LCGE). That means the first $824,176 that Roger—and any other shareholders in the business—earn from selling the shares are exempt from personal income tax.

Roger also now has flexibility in how he pays himself. He can decide if it’s better to take a salary, or pay himself through dividends, bonuses, or some combination of these. Roger’s wife also makes good money as a lawyer, so Roger might choose to leave his earnings in the business, and defer his personal taxes. Then, when his children go off to college and they need the extra money, he can reassess his strategy.

Pro tips for incorporated businesses:

  • Set up the right structures and track everything during the year. Don’t leave it to the last minute so that you’re scrambling at end of year. Go through your books on a regular basis (monthly or quarterly) so that you’re on top of everything.
  • Keep detailed corporate records that include any documents you file each year with the government.
  • Consult an accountant to help you run various scenarios and figure out the best way to pay yourself, and the best timing for you to collect your earnings, to maximize your tax benefits.
  • All tax codes have loopholes and exceptions, so it’s important to talk to a tax professional about what deductions apply to your personal situation.

Scenario #3: Incorporated self-employed owner with employees

Laura runs a small landscaping company. She’s been incorporated for the past five years, but she just hired a full-time employee to run her office and do some marketing. She also hired a woman who is newly retired and looking for a part-time job to help out with landscaping. She’s planning to hire a few full-time seasonal employees on contract to help her get through the busy summer season.

Laura now has to consider payroll taxes and deductions as part of her bookkeeping and end-of-year planning. Her first payroll tax remittance to the CRA will be due in the month after she pays her employees for the first time, so she needs to figure out what to do right away.

Payroll taxes and deductions

The biggest change for Laura is that she now needs to file payroll tax remittances, and make Canada Pension Plan (CPP) and Employment Insurance (EI) deductions, for her new employees.

Laura needs to have her new employees fill out TD1 forms so that she knows how much tax to deduct, and she’ll have to open a payroll account to be able to remit her contributions and deductions.

For the payroll taxes, Laura’s going to want to make sure she knows which remittance schedule she’s expected to follow. Paying late can rack up penalties of up to 10%. Missing more than one remittance a year drives the penalty up to 20%, and the government could ask her to remit more often, which would add to her paperwork.

There are different remitter types, and each type remits taxes on a different schedule: quarterly remitters (pay four times a year), regular (pay monthly), and accelerated (pay up to four times a month). Which remitter type Laura’s business falls into depends on her average monthly withholding amount (AMWA).

One more thing to consider is CPP. After age 65, employees can choose to stop paying CPP, but they have to fill out a CPT30 form with the CRA and give a copy to their employer. Laura should continue deducting CPP from her retired part-timer’s pay until she sees the form, or else she’ll be liable for the error. Employees who earn less than $3,500 a year don’t have to pay CPP contributions.

Pro tips for businesses with payroll taxes and deductions:

  • Make sure you’ve classified your employees correctly. You’ll need to understand how benefits, pension, and EI work for part-time, full-time and contract workers so you don’t file incorrectly.
  • Get organized. Put processes in place to make sure you’re staying on top of everything,  so you don’t forget to remit taxes or make careless errors. Using software that includes integrated bookkeeping and automatic remittances can help, as does working with an accounting professional.
  • Laura should make sure she’s up to date with the latest rules set by the CRA. Legislation changes all the time, so it’s important to check in with a tax expert regularly to stay on top of it.

The trick to making tax time less stressful is preparing ahead, and keeping to a schedule throughout the whole year. And make sure you pull in an accounting professional anytime you feel like you’re in over your head—you’ll thank yourself later!

Year end can be pretty stressful, especially for a new business owner. There’s a lot of information out there, but you can easily get lost in a sea of links and foreign terms.

We combed through tons of resources to put together an easy guide for first-time filers, as well as anyone looking to better understand what their accountant is saying. Check out these two common scenarios to understand how to prepare for year end and keep your accountant happy.

Scenario #1: Sole proprietor

Lucy brings in about $20,000 as a part-time graphic designer. She’s about to file her business taxes for the first time, so she’s working with an accountant to help her figure out how to file and what she can write off.

Filing taxes as a sole proprietor

Lucy has what’s called a sole proprietorship, meaning she’s the only owner of her business and it’s not incorporated. That means Lucy will file her personal and business taxes together using a Schedule C (Profit or Loss for a Small Business) with her Form 1040, rather than filing a separate business tax return. On Line 1 (“Gross receipts or sales”) on the Schedule C, Lucy will report all the income she’s made throughout the tax year.

Because Lucy’s self-employed, she needs to keep track of her income from all sources—cash, check, card payments—as well as anything her clients report on 1099 forms. She’ll pay income tax and self-employment tax on her net profit, so she needs to make sure to capture all possible expenses in her Schedule C to help reduce the bill.

Ways for sole proprietors to save on taxes

Lucy works from home, so she can deduct some of her housing costs on a Form 8829 (Expenses for Business Use of Your Home), including rent or mortgage payments, insurance and utilities.

Whether she can expense it or not, and how much, depends on the square footage of her home office, and how that space in her home is used. After speaking with her accountant, they decide Lucy can write off 5% of her home expenses.

She can also claim deductions on any business assets she bought for the business that lose value over time, known as depreciable property. In Lucy’s case, this means the new laptop she bought last month. She’ll fill out a Form 4562 (Depreciation and Amortization) to capture the true value of her laptop.

Lucy works from home and drives to meet her clients wherever they choose, so her accountant says she can enjoy the benefit of deducting some of her car expenses. She can use the current standard mileage rate to calculate her expenses, which takes into account gas, oil, insurance, car payments and repairs. This wouldn’t be the case if Lucy was commuting to and from a rented office every day and meeting clients there.

Lucy often picks up the bill for a coffee, drink or meal when she meets her clients. She can deduct 50% of the cost of those expenses, as long as business was discussed when they met. She can also fully deduct the cost of flights, taxis, airport parking, hotels, and a daily meal allowance from the design conference she attended earlier in the year.

Pro tips for sole proprietors:

  • Try to forecast your income and expenses based on the last year, and estimate how much you’ll owe in taxes using an online calculator.
  • Have a plan in place to save each month for the taxes you’ll owe at the end of the year so that it doesn’t become an unexpected expense that derails your business or personal finances.
  • Set up a system to manage your receipts, bookkeeping, and tax payments so that you have accurate records ready when tax time comes around again.
  • Make sure you know your tax deadlines and set calendar reminders.
  • Check Publication 535 for different business expenses you can write off.
  • Check Publication 463 for current mileage rates and accepted travel deductions.
  • Check Publication 1542 for current per diem rates and other information related to travel, meals and entertainment.
  • All tax codes have loopholes and exceptions, so it’s important to talk to a tax professional about what deductions apply to your personal situation.

Scenario #2: Partnership

Roger and two of his friends started an IT service company a few months ago. Their business is a general partnership, where each of them has an equal share in the business. Roger freelanced before, so he’s always filed taxes as a sole proprietor in the past. This is his first time filing taxes as part of a partnership, so he’s asked a tax expert to walk him through it.

Filing taxes as a partnership

There are two parts to filing taxes as a partnership. Income from the business itself gets reported on Form 1065 (U.S. Return of Partnership Income), and the individual partners each file a Schedule K-1 form based on their personal share of the business.

Roger and his partners will give their accountant a Profit and Loss Statement (also known as an income statement) showing the net income or loss, revenue sources, and deductible expenses. They’ll provide balance sheets for the beginning and end of the year. No tax will be calculated or paid from the 1065 form because partnerships are considered “pass through” businesses, where taxes pass through the individual owners.

Each partner will need to give their accountant their original partnership agreement so that their personal shares of the information captured in the 1065 can be recorded in their Schedule K-1s. They’ll need to show their share of the profits, losses, capital and liabilities at the beginning and end of the tax year, as well as their share of income and any money paid out to each partner.

They’ll want to capture all of their deductible business expenses on the Schedule K-1, such as rent, maintenance costs, taxes, licenses, permits, and employees’ pay. They’ll also capture any non-deductible expenses on the form, and other details about the partnership.

The 1065 and Schedule K-1 get sent to the IRS together, while the partners’ personal tax returns are filed separately.

Pro tips for partnerships:

  • Set up a system to manage your receipts, bookkeeping, and tax payments so that you have accurate records ready when tax time comes around again.
  • Go through your books on a regular basis (monthly or quarterly) so that you’re on top of everything.
  • You should have a plan in place to save each month for the taxes you’ll owe at the end of the year so that it doesn’t become an unexpected expense that derails your business or personal finances.
  • Make sure you know your tax deadlines and set calendar reminders.
  • All tax codes have loopholes and exceptions, so it’s important to talk to a tax professional about what deductions apply to your personal situation.

The trick to making tax time less stressful is preparing ahead, and keeping to a schedule throughout the whole year. And make sure you pull in an accounting professional anytime you feel like you’re in over your head—you’ll thank yourself later!

Categories:   Year end guide
Kristin Knapp
By Kristin Knapp
Disclaimer

The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”