Filing Taxes as a Small Business Owner
How you file your taxes as a small business owner depends on whether you’re a sole proprietor, a partnership or incorporated. You have to submit the right forms to the Canada Revenue Agency and use the appropriate tax rates. Declaring all your business income and deducting your allowable expenses helps you file your taxes correctly.
Filing Taxes and Business Structure
When you operate a business by yourself and are not incorporated, you are a sole proprietor. The profit you make is added to your income on your personal income tax form, but financial information has to be filed on form T2125. In addition, Quebec residents have to file the same information on Form TP-80-V. If you run an unincorporated business together with someone else, you operate a partnership and have to complete the sections on partnerships on the same forms.
If you incorporate, your corporation is a separate entity and pays its own taxes. You file your corporate tax information on Form T2 and pay any taxes due independently of your personal taxes. While your personal income tax year corresponds to the calendar year, you can choose your corporate tax year to start whenever you want.
Advantages and Disadvantages
One advantage of incorporation is that the corporate tax rate for small businesses is lower than the personal tax rate if your income is in the high income tax brackets. On the other hand, the corporate tax form can be more complicated, requiring financial statements and a balance sheet. For sole proprietors and partnerships, you can deduct your losses from other income but the losses from a corporation stay within the company.
Heather Lowe runs an agency for professional actors in Montreal. She used to operate as a sole proprietorship but is now incorporated. “When the business was small and didn’t make much money, it made sense to keep things simple,” she says. “We lost money for a couple of years, and I was able to deduct the losses against my income as a teacher.” Incorporated since 2008, her numbered company now files corporate income taxes.