Uncovering the Small Business Minefield
0Fuelled by the desire to be one’s own boss or the need to find new employment, self-employment has become a major growth industry. If you are among the expanding numbers of Canadians who have chosen self-employment, it is important to be aware of the small business rules that can help you safely negotiate a minefield of taxes and other penalties. This knowledge can lead you into the promised land of keeping the most of what you earn. Here are some important small business rules you need to know for a sole proprietorship.
A sole proprietorship is the simplest business structure; it is an unincorporated business owned by one person. You make all of the decisions, gain all of the profits and claim all of the losses. You also assume all risks of the business – including those that extend to your personal property and assets.
As a sole proprietor you:
- Must pay personal income tax on all net income generated by your business. You may be required to make quarterly installments of income tax payments and you will be subject to a penalty for any missed payments.
- If you or your spouse are reporting business income on your return, it is due on June 15th. Tax liability payments, however, are due on April 30th and late payments will be assessed interest on the outstanding amount.
- Are required to make Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments on your self-employed earnings or pensionable earnings for each year. You may be required to make quarterly installment CPP/QPP payments.
- Must register for the goods and services tax/harmonized sales tax (GST/HST) if your total taxable revenues are more than $30,000 and add GST/HST to your client/customer billings. Based on the sum of your billings, you will be required to remit GST/HST amounts to the government on a regular basis.
- Must maintain adequate accounting, financial and other documents that provide sufficient details to determine your tax obligations and entitlements. In most cases, you must retain this information for six years beyond each tax year.
- May deduct from taxable income all reasonable expenses incurred to earn business income including 50% of expenses for meals and entertainment; a percentage of your vehicle costs; a percentage of you housing costs for a home office, and so on. However, home office expenses cannot be used to generate or increase a business loss.
- May be able to deduct premiums paid for personal health care and dental plans.
- Will require a separate bank account to process cheques payable to your business, if your business has a name other than your own.
There are other small business structures that exist that could better suit your business goals, such as having a partnership or incorporating your business.
No matter which small business structure you choose, shorten the distance to financial success by keeping informed and discussing your options and personal goals with your professional advisor.
