Small Business Taxes in Canada: A Guide for Entrepreneurs

Small businesses, or companies with only 1 to 99 workers, play a crucial role in Canada’s economy. In 2022 alone, 98 percent of employer businesses in the country fell into this category, creating jobs for 10.7 million individuals.

Entrepreneurs who want to contribute to the economy by starting their own small businesses must understand the tax responsibilities. If you’re unsure where to begin, this guide is for you. After reading, you will be confident in keeping your business profitable and compliant.

Business Taxes: What Entrepreneurs Need To Know

You must pay a sales tax if you sell a product in Canada. One example of a federal sales tax is the Goods and Sales Tax (GST). It applies to businesses that meet the following criteria:

• Your business offers taxable property and services in the country 

• Your total taxable revenues go over $30,000 in four consecutive calendar quarters or any single calendar quarter 

Businesses must also file a tax return at the end of their first year of activity to determine how much tax they must pay. 

One crucial element that impacts tax obligations is your company’s legal structure. Most small businesses begin as sole proprietorships or partnerships. Owners of companies with these structures must report business income on the T2125 form and their T1 personal income tax return. Meanwhile, those operating incorporated businesses must file a Corporation Tax return or T2.

However, income tax laws vary by province and territory, so you must read up on the laws in your province to complete your annual tax return. You can also hire expert tax consultants to guide you through the process.

Thankfully, the Canada Revenue Agency (CRA) provides small business entrepreneurs with a free liaison officer service. The agency offers it to help business owners understand their tax obligations.

In Canada, the provincial and territorial tax rates undergo annual updates. The government website regularly publishes the updated tax rates on the official website to keep taxpayers informed.

3 Tips for Tax Season

Tax time does not have to be a stressful occasion for entrepreneurs. With the proper habits and tools, business owners can breeze through it and keep their businesses afloat. Read the tips below to pay your business taxes completely and on time.

Read up on tax deductions

Entrepreneurs can claim tax deductions and credits to lower liability. When you apply a deduction to your income, you also reduce the percentage of your profit that is taxable.

By tracking your expenses all year round, you can quickly identify potential costs you can claim as deductions come tax time. Visit the government website for a complete list of expenses you can claim as deductions.

Organize your paperwork early

You must organize your paperwork even before tax time so you can be ready to file your return. Remember that the sooner you get your books in order, the better. 

Moreover, it will be easier to pay your taxes if you make it a habit to stay on top of your bookkeeping throughout the year. You can make this process easier by using digital bookkeeping tools that can help you manage your digital documents. With these tools, you can enjoy the following benefits:

• Automatically track receipts and invoices

• Be ready for an audit from the CRA

• Have the proper documentation as proof when claiming tax deductions

Work with professional accountants

Late tax payments and tax evasion in Canada carry severe penalties. If the CRA determines that you made omissions in your tax return, you may have to pay a hefty fine or face jail time.

If you cannot file taxes for your business on your own, you should seek assistance from experts. They can complete your accounting tasks, allowing you to focus on other aspects of your business. 

For example, tax problem solvers at Faris CPA provide tax assistance to small- to medium-sized businesses. They specialize in handling tax disputes, CRA audits, penalty issues, and disclosures. With the help of accountants, business owners can avoid undue taxes and penalties.