Being a sole proprietor often means your business-related tasks, like bookkeeping, fall on you. Even worse, filing as a sole proprietor, especially for a cash-intensive business, makes a tax audit in Canada more likely. There’s nothing you can do about that. However, following these tax-filing tips can stack the odds in your favour.
Track Payments and Business Expenses
You are in for a world of hurt if you wait until the last minute to start looking through your receipts, or worse, looking for them. It is fatally easy to miss many things in that situation. The lazy way is to record expenses as soon as you get the receipt so you won’t have to go through them again.
Separating your business bank accounts and credit cards is also an excellent idea. It is easier to track business expenses and deposits that way.
Another tip is to list your monthly expenses and payments. It will give you a good sense of how much money you are making and spending (and will owe). Doing your taxes will be much easier and with far fewer surprises.
Know Your Deductions
One of the greatest benefits of being self-employed is the number of things you can deduct or “write off” – primarily if you work out of your home. “Business use of home” expenses mean you can claim a portion of your:
- Mortgage or rent
- Home repairs
- Utilities
- Phone, internet
- Home insurance and taxes
Additional deductions you can claim as a sole proprietor include:
- Business parking, transit, travel, hotel rooms
- Food and entertainment (business-related)
- Motor vehicle expenses (document business mileage)
- Marketing, professional memberships, websites
- Product inventory, office supplies, and other tools
- Professional services (accountants, lawyers, etc.)
- Liability insurance
Know What To File
Suppose you didn’t make money, operated at a loss, or the business is inactive. You must still file your business and personal taxes using a T2125 form.
You might also need to file a T1 return under the following circumstances:
- Sold property or had a taxable capital gain
- Made Canada Pension Plan (CPP) payments on earnings
- Planned to access employment insurance (EI) special benefits
- Received a demand to file a return
- Claimed an income tax refund, the Canada Child Benefit, a refundable tax credit, a GST/HST credit
- Eligible to receive provincial tax credits
Speaking to a tax accountant is recommended to ensure you file the correct type of return. You should know that most sole proprietors must file a tax return for the previous year on or before June 15 of the following year.
However, if you owe the government money, you must pay the taxes by April 30, or the CRA will start charging you compound daily interest starting May 1.
File on Time
Suppose you didn’t turn a profit in 2023. You must still file your business tax return on time to avoid late-filing penalties and interest for what you owe the government. Suppose you owe money but don’t have enough to pay in full. In that case, the Canada Revenue Agency (CRA) offers payment arrangements to make it easier.
Save Money in Anticipation
If you operate a sole proprietorship and have a day job where you get a salary, you may be surprised by how much you owe by year-end. That is especially true if you previously had your taxes and CPP payments as automatic salary deductions.
As a sole proprietor, you are responsible for figuring out your taxes and other payments owed. If you wait until tax time and don’t save money in anticipation of a big tax bill, you may be scrambling to pay what you owe. It also helps to allow for RRSP contributions, as these can offset the taxes you will owe.
Finally, unless exempt, you must register for GST/HST once your business makes $30,000 or more in 12 months. It would be best if you started charging GST/HST on your taxable supplies, or you will end up paying them yourself. In either case, set aside that money for tax season.
Know When To Pay in Installments
You may have to pay tax in installments if your income does not have enough tax withheld or if you are self-employed. That also applies when you have rental or investment income, certain pension payments, or income from multiple jobs.
The CRA requires you to pay your taxes in installments under the following conditions:
- Your net tax owing for the previous year is more than the threshold amount for your province or territory (which is anywhere from $1,800 to $3,000, depending on where you live)
- Your net tax owing in the year or two before the taxable year (i.e., 2023) was over the threshold for your province or territory
The CRA will send reminders to pay income tax and GST/HST installments; you want to ensure you get those. Update your address and email on file to get information on time.
Pay Promptly
If you can pay in full and not in installments, the deadline is April 30. Suppose you should have paid in installments. In that case, the CRA likely set the deadlines to pay quarterly within the previous year. If you have yet to pay your taxes by now, you are likely accruing interest on the balance due.
Suppose you don’t know exactly how much you owe. In that case, estimating and sending payment as soon as possible is better to minimize interest charges. Estimate more than you think you owe. If you overpay, you will get a refund once you file your taxes.
Know When and Where To Get Help
It can be challenging to run a business by yourself, but there are some things you can delegate. Consult an accountant before you find yourself being audited, owing money, or needing advice. Doing so often pays for itself if the direction can save you money. It is a business expense, so you can deduct it from your taxes.
