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You are here: Home / Finance / Understanding the Tax Implications of Owning a Small Business in Canada

Understanding the Tax Implications of Owning a Small Business in Canada

Orginally Posted On: December 29, 2022 By Brittni Abiolu -- Updated On December 29, 2022

Starting a small business can be an exciting and rewarding venture, but it also comes with its own set of tax considerations. Here are some key points to keep in mind when it comes to the tax implications of owning a small business in Canada:

Choose the right business structure

Table of Contents hide
1 Choose the right business structure
2 Register for the appropriate taxes
3 Self-employment taxes for CPP and EI
4 Keep track of your business expenses
5 Know your tax obligations as a self-employed individual
6 Be aware of any temporary tax measures
7 Capital cost allowance
8 Tax planning

The type of business structure you choose can have significant tax implications. For example, a sole proprietorship is a simple and straightforward structure, but it means that you are personally responsible for all of the business’s debts and taxes. On the other hand, a corporation offers liability protection, but it also comes with its own set of tax rules.

Register for the appropriate taxes

Depending on the nature of your business, you may need to register for various taxes, such as the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST). It’s important to understand which taxes apply to your business and make sure you are registered and paying them correctly.

Self-employment taxes for CPP and EI

If you are self-employed, you are responsible for paying both the employee and employer portions of Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums. These contributions are calculated as a percentage of your self-employment income.

Keep track of your business expenses

As a small business owner, you can claim many of your business expenses as deductions on your tax return. This can help to lower your overall tax burden. It’s important to keep detailed records of all of your business expenses so you can claim them accurately.

Know your tax obligations as a self-employed individual

If you are self-employed, you are responsible for paying your own taxes. This means that you need to set aside money throughout the year to cover your tax bill. You will also need to file a self-employed tax return and pay taxes on your net income (i.e. your income after deducting business expenses).

tax implications canada

Be aware of any temporary tax measures

The COVID-19 pandemic has led to several temporary changes to the tax system in Canada. For example, there have been deferrals of tax payments and changes to the rules for claiming the Canada Emergency Wage Subsidy. It’s important to keep up to date on any temporary measures that may affect your small business.

Capital cost allowance

If you own business assets, such as machinery or equipment, you may be able to claim a capital cost allowance (CCA) on your tax return. The CCA is a tax deduction that allows you to recover the cost of these assets over time.

Tax planning

To minimize your tax burden, it’s important to plan ahead and consider the tax implications of your business decisions. This can include things like setting up a registered retirement savings plan (RRSP) or incorporating your business. Using the services of a tax accountant is recommended. Overall, understanding the tax implications of owning a small business in Canada is essential for ensuring that your business is successful and compliant. By staying informed and keeping accurate records, you can navigate the tax system and focus on running your business.

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Brittni Abiolu
Contributor at Small Business Brain
Brittni is a millennial, entrepreneur, investor and philanthropist. She has a Bachelor of Science in Computer & Information Systems from the University of Detroit Mercy and a Masters in Entrepreneurial Transactions from Central Michigan University. She enjoys writing about her experiences as an entrepreneur and using data and information from reliable sources to back up what she writes about. Through her writing she aims to educate other entrepreneurs on how to launch successful businesses and build wealth through entrepreneurship.
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