Small Business & Corporation Tax Prep & Planning Guide
Introduction to Small Business & Corporation Tax Prep Guide
Getting ready for tax season can start anytime, and even though we are early into the new year, it’s a great idea to start thinking about how to optimize next year’s return - which is why I’ve written this small business and corporation tax prep and planning guide!
As a holistic accountant, I’ve worked with a number of businesses to help get them a full picture of their finances. If you’re wanting to get on top of your record keeping and tax planning for next year, I’d recommend starting here. Getting organised early on and exploring the different deductions you may be qualified for will help you get ready for the 2021 tax season.
In this blog, I’ll go over a few different areas that are important for preparing your taxes and getting a handle on your income. I’ll begin with discussing what can be considered ‘business income’, and some recommendations for invoicing software. Next, I’ll go over the T2 and T2125 and the different types of deductions that can be made. Additionally, I’ll make time to break down the CRA online account and what information you need to get registered for it. Finally, as we are rapidly approaching the 2020 tax season, I’ll go over the ways you can prep your documents to make things smoother for your accountant.
When is it time to declare your business income?
There are many different ways to imagine business income. Maybe you work full time and make sewn bags on the side for craft fairs. Or perhaps you have a gig writing for different Buzzfeed-style pop culture news sites. Maybe you’re self-employed full time and your ‘side hustle’ became your day job. Whatever income that comes from a service or good you’re providing and isn’t full time employment for another company is a business income.
Your business income, and the value of your goods and services should be considered ‘monetary value’ rather than money. If you barter or trade your goods with another business or person, you’re still receiving an income - so it should be declared on your taxes.
Additionally, the CRA considers all types of income as business income. It doesn’t matter if it’s brick and mortar or online. Make sure all of your income is declared in order to avoid audits and penalties down the road.
What are the tax forms required for small businesses?
Small businesses will have different tax forms to complete depending on their individual situation. I’ll go over a few different types of businesses that can exist in Canada and the tax forms that go along with them:
Canadian-Controlled Private Corporations (CCPCs)
A Canadian-Controlled Private Corporation is essentially what the name suggests: it’s a corporation that is incorporated in Canada and run by Canadians. The Government of Canada’s website states that a CCPC need to meet all of the following requirements:
It is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
It is not controlled directly or indirectly by one or more non-resident persons
It is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
It is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
It is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
If all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
No class of its shares of capital stock is listed on a designated stock exchange, for example, the Toronto Stock Exchange (TSE).
An important thing to note about CCPCs is that their eligibility may change as the business grows and shifts. If the corporation decides to bring in a leader that is not a Canadian, they may no longer qualify. A CCPC needs to take this into account any time they make any major business decisions - as it could affect their taxes going forward.
With all of these requirements, what are the benefits of being a Canadian-Controlled Private Corporation?
CCPCs qualify for reduced income tax rates and certain deductions that are better than what other private corporations would qualify for. If you think your business qualifies to be a CCPC but you need advice, get in touch with me. As a holistic accountant, I can look at your complete business picture to see where you may qualify for better tax rates, grants, or deductions.
Other Private Corporations
A corporation can be considered an ‘other private corporation’ if it meets these requirements from the Canada Revenue Agency:
it is resident in Canada
it is not a public corporation
it is not controlled by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700 of the Income Tax Regulations)
it is not controlled by one or more prescribed federal Crown corporations (as defined in Regulation 7100)
it is not controlled by any combination of corporations described in the two previous conditions
If there are less tax benefits for this type of corporation than a CCPC, why incorporate? Incorporating your business means that a lot of the liability gets transferred onto the corporation. If your business is sued or goes bankrupt, your personal financial picture is protected.
Sole Proprietorships + Partnerships
Sole proprietorships and partnerships are the easiest business to set up and maintain. Essentially, your business is you! Unlike corporations, you will be liable for any lawsuits or financial responsibilities of the business, and you are considered to be self-employed. You’ll need to reserve a business name and fill out a statement of registration.
Tax Forms - the T2 vs T2125
The T2
The T2 is the income statement that a corporation fills out for the Canada Revenue Agency. Even if your corporation makes no income or is at a net loss you still need to file a return.
You can access the form at the Canada Revenue Agency’s website, along with a handy and detailed guide to filling it out. If you have an incorporated business, you will still need to fill out a T1 (personal income) tax form as you are legally separated from it. There are a few deductions you may qualify for, including the following:
Capital Cost Allowance
The capital cost allowance (CCA) is used when you acquire property or equipment that depreciates over time. The deduction is based on the value that the equipment will lose over a period of time, not the full amount of the item.
For example, if Bob bought a crane for his business he knows that this will not be a permanent asset and will be subject to wear and tear. He predicts that this crane will be a usable asset for 25 years, and will therefore depreciate at 4% every year. He can deduct that 4% under the CCA every year until it is no longer a usable asset.
Registered Retirement Savings Plan (RRSPs)
RRSPs are retirement plans that are registered through the Canadian government that you can contribute to. RRSPs are one way to reduce income for your return, and are typically tax exempt as long as they remain in the plan. When you retire and use these funds, the payments to you will be taxed.
Scientific Research and Experimental Development
This deduction is meant to provide incentive to Canadian businesses to expand their work in research and development. The Canada Revenue Agency offers a helpful guide to help determine your eligibility including the types of research that qualify, including basic research, applied research, and experimental development.
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. In one of my other blog posts, “The Individual and Sole Proprietor Tax Guide”, I go over this form in significantly more detail, including highlighting the different sections you will need to prepare for.
How do you get your business receipts and expenses organised?
As we prepare for tax season this year, it’s important to get your documentation ready. Having looked at the T2 and T2125, it’s easy to feel overwhelmed by all of the different sections and information needed in order to file.
In this section, I’ll go over some recommendations on what information is important to give to your accountant or have on hand when it’s time to bring out the tax software.
1 - Receipts for deductions - home-based businesses
If your home is the office, you can deduct expenses based on the amount of space you use to run your business. Additionally, you can deduct a percentage of mortgage interest, certain utilities, and rent (if applicable.) It’s important to keep your receipts for these payments as they are important for reducing your income tax payment!
2 - Registering for a CRA online account
The CRA My Account and My Business account are used to file your taxes, make payments and receive important information from the agency. You’ll need some information before you can apply.
My Account - for individuals information needed:
Your Social Insurance Number
Date of birth
Current postal code
Current or previous year’s tax return (used to verify your information)
My Business - for corporations:
You will need all of the above information plus your business number when you are allowed to log in.
The accounts offered by the Canada Revenue Agency are important for filing taxes and checking GST credits and are easy to set up, so make sure you apply right away! It can take some time to authorise as the CRA will need to physically mail you an access code.
3 - What your accountant needs from you
If you decide to bring an accountant on board to help file your taxes, there are some ways to make things easier for them. Start by collecting the following information:
Financial Statements
Payroll Information
Business expenses
Motor vehicle expenses
Asset additions + disposals
Business use-of-home details
Notice of assessment from the previous year
Any taxes already paid
Corporation : T2, sole proprietorship T1 + T2125
T4 - Statement of Remuneration Paid
T4A - Statement of Pension, Annuity, Retirement and Other Income
T5013 - Statement of Partnership Income
T3 - Statement of Trust Income, Allocations and Designations
T5 - Statement of Investment Income
RRSP contribution slips
Charitable donations
Medical and dental receipts
Childcare information
So, you have the tax paperwork. What now?
Using the categories above, sort your receipts and label them. On the labels, include the calculated totals. Additionally, add some background information for your records and calculate your invoices by month. Include cheques, invoices and business expenses!
If you have multiple businesses, make sure you have a separate package for each business and separate the income streams completely to make things more straightforward. This will reduce the number of hours the accountant will need to spend sorting through your paperwork and make filing so much smoother!
Conclusion to Small Business & Corporation Tax Prep & Planning Guide
In this article, I went over a lot of information about filing taxes as a corporation or a small business. I began by going over the different types of corporations in Canada, and how they differ from a sole proprietorship. The T2 and T2125 were defined, along with different deductions that small business owners can take advantage of to lower their income tax payments. We then looked ahead to tax season, and discussed how you can get all of your paperwork organised for your accountant or for yourself if you use tax software.
Filing taxes as a small business or corporation can seem daunting. There’s a lot of information, and it can be overwhelming to sit down and sift through.
If you feel like it’s time to bring in a professional, I’m here to help. I offer tax return services catered to businesses, meaning I can find the best deductions for your company. As a holistic accountant, I can’t wait to work with you and help build a healthy picture of your business now and in the future.
