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
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).
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.