How to complete your tax filing as a sole proprietor?

To read more chapters, click below: 

Chapter 1: Beginner’s guide for self-employed taxes

Chapter 2: Determine if you are an employee or an independent contractor

When you run your own business, it is such an exhilarating felling. The highs and lows that come with it are all a learning. But a lot of people who are business owners, especially new ones get confused about the tax filing process. We understand that the process can be slightly long, but when you have the right kind of expert advice it all falls into place.

As a sole proprietor in Canada, you have different tax filing deadlines as compared to employees and independent contractors. This chapter discusses in detail all that you want to know about tax filing as a sole proprietor.

Who is a sole proprietor in Canada?

A sole proprietor in Canada is an individual who owns and operates a business on their own, without forming a separate legal entity such as a corporation or a partnership. In this business structure, the owner is personally responsible for all aspects of the business, including its finances, operations, and liabilities.

Key characteristics of a sole proprietorship in Canada include –

• Ownership: The business is owned by a single individual who is solely responsible for its operations and decisions.
• Liability: The owner has unlimited personal liability for the debts, obligations, and liabilities of the business. This means that personal assets could be at risk to cover any business-related losses.
• Taxation: The income generated by the business is typically reported on the owner's personal income tax return. A sole proprietorship does not pay corporate income tax separately.
• Simplicity: This is one of the simplest forms of business structures to set up and manage. There is minimal paperwork and regulatory requirements compared to more complex business entities.
• Decision-making: The owner has complete control and authority over all business decisions.
• Flexibility: Since there is no legal distinction between the owner and the business, the owner can make quick decisions and changes.
• Transfer of Ownership: Selling or transferring a sole proprietorship can be more complicated compared to other business structures, as the business is closely tied to the owner's identity.

Tax filing deadline for sole proprietors

Under Canadian tax regulations, a sole proprietorship is regarded as the proprietor's source of income. The proprietor is obligated to disclose the business's financial particulars on their personal income tax return, albeit in a distinct section.

A recurring observation with sole proprietors is the intricate interconnection between their business and personal affairs, particularly in terms of taxation. This setup offers certain benefits to the sole proprietor. For instance, if the business incurs a loss, that deficit can be employed to offset income acquired from alternate origins. This explains the prevalence of sole proprietorships among part-time business ventures.

Individuals who are self-employed, including sole proprietors, are granted an extended deadline of June 15^th to submit their income tax returns. This extension also encompasses spouses and common-law partners who are self-employed. Therefore, if your spouse or partner falls into this category, you both share the same deadline of June 15^th for filing. It's important to be aware, however, that any outstanding balances for income tax payments were originally due by April 30^th.

Benefits of sole proprietorship in Canada

Some of the main benefits of sole proprietorship in Canada include the following –

• Affordable and easy

Opting for a sole proprietorship offers flexibility as a business structure. Its uncomplicated nature and reduced paperwork assist in maintaining compliance with employment and taxation regulations.

• Freedom and flexibility

If your sole proprietorship business remains small, you have the option to collaborate with other businesses. Modifying business policies is a straightforward task, devoid of time and financial complexities. These processes demand minimal approval, enhancing the company's flexibility and granting a sense of freedom.

• Simple tax reporting

Effortless tax reporting services stand out as a key benefit of being a sole proprietor. Moreover, these businesses are not obligated to file separate taxes.

• Convenient banking method

Simplified banking pertains to convenient payment methods that offer advantages to a business. As a sole proprietor, you have the capability to make business payments directly from your bank account, and retrieving cheques is also a straightforward process.

Form T2125 for business tax deductions

Form T2125 is a specific tax form used in Canada by self-employed individuals to report their business income and expenses as part of their personal income tax return. It's often referred to as the "Statement of Business or Professional Activities" form.

If you're a sole proprietor or an individual who operates a business as an independent contractor, consultant, freelancer, or any other self-employed capacity, you would use Form T2125 to report the details of your business activities for the tax year. This form helps you report your gross business income, deduct eligible business expenses, calculate your net business income, and determine the amount of income that will be subject to taxation.

Form T2125 will document all your business expenses and deductions, which will then be subtracted from your business income. This calculation yields your net business income or loss. Here are some of the main deductions that are you eligible to claim.

1. Business operating expenses

• Advertising fees
• Start-up costs
• Cost for delivery and shipping
• Office supplies cost
• Legal, accounting, and other professional fees
• Phone and internet cost
• Utility costs

2. Entertainment and travel expenses

3. Vehicle expenses

• Petrol/ diesel
• Insurance cost
• Repair and maintenance cost
• Parking fees

4. Office and hone office expenses

GST/ HST for sole proprietors in Canada

The guideline states that if the value of your goods and services reaches or surpasses $30,000, you are obligated to levy GST/HST. To manage the collection and remittance of these taxes, you need to obtain a GST/HST number by registering. Once your GST/HST account is established, it's crucial to maintain records of your effective date and upcoming filing deadlines.

Once you initiate the practice of charging GST/HST, you're required to sustain this practice for as long as you maintain a GST/HST account. The sole way to cease this practice is by closing your account.

Another important point to keep in mind is the variation in GST/HST rates across provinces. Starting from October 1, 2016, the GST/HST rate stands at 5% for Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon. For Ontario, the rate is 13%, while for New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island, it's 15%. (Given the potential for rate changes, it's advisable to verify your rates regularly.)

Report your income tax on your T1 return

There's no requirement for a distinct tax return solely for reporting your business income. Your comprehensive global income is documented on the T1 general income tax return. Consequently, whether you possess multiple businesses, combine employment and business income, or even factor in investment or pension income, all of these are consolidated onto a single tax return.

The income from your business is detailed in Form T2125, which is incorporated within the T1 return. In instances of possessing multiple businesses, a separate T2125 form must be used for each of them.