Individual and Sole Proprietor Tax Planning Guide
Introduction
This tax season, get ahead and on top of your books with this handy guide to claiming income as a sole proprietor and an individual.
In this post, I’ll go over the difference between filing as an individual and a sole proprietor. I’ll also get into more depth and look at a few different tax forms, including the T1 and T2125, which are used to file your general and business income.
Confused about charging GST and claiming it in your taxes? No problem! I will talk about that as well. Finally, I will go over the best accounting software and how they can help make filing easier for next year.
Feeling overwhelmed? I get it! Starting your business and doing taxes as a sole proprietor can be a lot - especially when your main focus is on generating income, not managing your invoicing. As a holistic accountant, I take a look at your entire financial picture to help in a variety of different areas, including tax services.
Getting Started
What’s the difference between filing as an individual and as a sole proprietor?
There are some key differences between claiming as an individual or as a sole proprietor. Essentially, everyone can claim as an individual - but not everyone can claim as a sole proprietor.
As an individual, you’ll claim your personal income that you received during the year. The slip you’ll be given by your employer would be a T4. You may receive other income as well which we will detail further in the next section.
A sole proprietor is a person who runs an unincorporated business on their own. If there are debts and losses within the business, the responsibility falls on the owner to ensure they are paid.
Additionally, if the business is involved in a legal dispute the sole proprietor is held personally responsible for the ruling. There are benefits and drawbacks to managing a sole proprietorship - but luckily it’s the simplest business to run and file taxes for. Sole proprietors will file a T2125 and a T1 - which will be explained in more detail in the sections to follow.
Filing your Taxes as an Individual
Everyone has to file as an individual. If you are not a sole proprietor or your business is not your main source of income, this is the section for you!
1. T1 - General Income Tax and Benefit Return
The T1 form is the form you file with the CRA. Each line corresponds with different forms that you may receive depending on your financial picture and your sources of income. The forms below are used as information to claim income, deductions, expenses, and credits - and are provided by a variety of institutions.
2. T4 - Statement of Remuneration Paid
The T4 is the standard income slip you receive from your employer.
Individuals will be sent their T4s through the mail or will be made available through your CRA online account. The due date to receive your T4 is the last day of February every year, so make sure to follow up with your employer if you do not have it!
3. T2202 - Tuition and Enrolment Certificate
The T2202 summarizes the tuition paid during the previous calendar year. It is a substantial credit towards your income tax and can be saved for future years if you aren’t earning enough income to need it. It also provides the number of months you are eligible for the education deduction. You will receive your T2202 from your school.
4. T2201 - Disability Certificate
The T2201 is a disability certificate that allows you to claim credits on your income. It will help offset medical expenses and other equipment needed. The T2201 can be filled out with the help of your doctor or specialist, who will assess and describe your limitations as required in the document.
5. T3 - Statement of Trust income allocations and designations
The T3 is a statement summarizing the income generated from investment accounts in non-registered accounts and from certain trusts. You should receive it by the end of March of each year.
6. T5 - Statement of investment income
This slip is a more generic statement of income from investments and can include high-interest savings accounts. You will pay taxes on the interest accrued from these accounts, as well as other investments.
7. T4E - Statement of Employment Insurance and Other Benefits
If you had to claim the Canadian Emergency Response Benefit (CERB), the Canadian Emergency Student Benefit (CESB), or Employment Insurance (EI) over this past year you’ll need to pay taxes on that income. The T4E will be mailed to you or can be found on your CRA online account.
8. T4A - Statement of Pension, Retirement, Annuity, or other income
The T4A is used to catch all other types of income not defined by your other tax slips, including proceeds from your pension, retirement allowances, or benefits for medical premiums. Do not confuse this with your T4, T4A(P), or your T4A(OAS) - and be sure to read each slip very carefully to ensure you’re putting your information in the right place.
9. T4A (P)/(OAS)
OAS - Statement of Old Age Security
The T4A (OAS) is used specifically to provide information on income received from the Old Age Security Benefit, and how much income tax has been deducted.
P - Statement of Canada Pension Plan Benefits
The T4A(P) is used specifically to provide information on income received from your Canada Pension Plan, and how much income tax was deducted throughout the year.
Why It’s Important to File on Time
It’s important to make sure you file by April 30th. If you think you may have taxes owing, the government can begin to charge you interest until you decide to file, which can add up quickly.
Even if you’re worried about paying the full amount, file anyway! The CRA can work with you to determine appropriate repayment plans that you can afford. If you need to speak with the CRA and don’t know your options, I can help with that. My services include corresponding with both Provincial and Federal tax authorities on your behalf. Get in touch with me to get started.
Claiming as a Sole Proprietor
Prepping for your taxes
In this section, I’ll go over some of the steps you’ll need to take as the owner of a small business. Getting started early is the best advice I can give when preparing for your taxes. Having your invoices organized and well tracked, and putting aside a portion of your income for taxes will help alleviate the stress of filing!
1. Getting your GST Number
Planning for your business means registering for a GST/HST number - and the sooner you do this, the better. It’s absolutely critical that you charge GST/HST if you qualify to do so right away, so you aren’t charged later on for something not collected.
There are two qualifications to be considered when deciding to register your business with a GST number.
1 - “You make taxable sales, leases or other supplies”
2 - “You are not a small supplier”
If you are unsure where you fit in these categories, check out the links for the precise definitions from the CRA’s website. Still confused? Get in touch with a CPA!
2. T2125 - Statement of Business or Professional Activities
The T2125 is a summary of how your business performed over the year and gives you an opportunity to offset some of your expenses and claim them against your taxes. There are eight parts to this form, and I will go over each section, in brief, so you have an understanding of what to prepare.
Part 1: Identification
For this step, you’ll need to make sure you have your business number, name, and address. Additionally, it’ll be important to determine what your industry code is, as well as your main product or service.
Part 2: Internet business activities
This is only applicable if your website generates significant income (for example, if you host ad space or are a content creator.)
Part 3A-3D: Income
Hopefully, you’ve been using a good system to track your invoices - as you’ll need to provide an accurate picture of your business/professional income. I recommend an invoicing program in the next section, and also talk about it in one of my blog posts on the top 10 accounting software of 2020.
If you’re feeling buried in your paperwork, and don’t know where to start, I can help! I can perform a Financial Health Check, which looks at your past three years of finances to see where you can grow your business. I also offer bookkeeping services if you need to get back on track.
Part 4: Net income (loss) before adjustments
Part 4 is where you declare all of the expenses your business accrues over the year. This includes expenses like stationery, bank fees, insurance, office space (if renting), and professional fees. It’s important to keep your receipts throughout the year, but to also keep a running tally of your expenses so when it comes time to file taxes, you’re ready!
Part 5: Your net income (Loss) and Part 6: Other amounts deductible from your share of the net partnership income (loss)
This is related to income related to your business partnership, which is not applicable as a sole proprietor.
Part 7: Calculation of business-use-at-home expenses
If you’re working from home, you can calculate the square footage dedicated to your office and declare a portion of your expenses such as BC Hydro, rent, and repairs. This is the section where you add up these expenses over the year and input them. Do not confuse your home office as an expense in Part 4! It’s important to input it here.
3. Invoicing Software
Part of what makes tax season easier is setting yourself up for success early in the year. Making sure you have robust invoicing software is a great place to start. I detailed in the previous blog my top eight choices for accounting software, but I believe it is important to go over some of the features and how they can make preparing for taxes a lot easier.
Invoicing software helps track the income and expenses that your small business generates. Some carry features that track inventory and their costs, as well as how long they have been on the shelves.
If you are in a service-based industry and don’t sell products, an invoicing service is still incredibly beneficial. Take Freshbooks for example. I highlighted it as my favourite software for affordability as well as versatility and the ability to track and request payments directly in the app.
While it tracks your business income, it can also track the income you make if you have a main source of employment, and any types of expenses you accrue. It’s a robust tool for making your taxes a breeze!
Conclusion
In this blog, I covered a lot of information surrounding filing taxes as an individual and a sole proprietor. I defined the two terms, “individual” and “sole proprietor” in order to give you a better sense of where you might fit when it comes time to file. I then gave a list of some of the top tax forms you may expect to receive as an individual for this year, so you know what to keep an eye out for.
After going over the individual side of tax filing, I went into detail about how to prepare your small business for tax season. As a sole proprietor, I defined the criteria for getting a GST number, as well as the different parts to the T2125 so you know what information to have ready when it comes time to process your paperwork.
Finally, I went over methods to get you better prepared for the next time you file! If you realized this year you weren’t as organized as you would like, or you’re still feeling confused as to what you need to prepare and declare for your income taxes, get in touch! I offer a wide variety of services including:
Tax Services, Bookkeeping and Payroll
Preparation of Financial Statements
Financial Health Check
Business Consulting Services
I can’t wait to start working with you!
