Filing your first income tax return as a business this year? Here's what you need to know about completing and filing your Canadian income tax return.
If your business is a sole proprietorship or partnership, you use the same income tax return to file your business taxes that you use to file your personal income taxes in Canada – the T1 income tax form.
What you will be doing is declaring all your income using this one form, whether it is income from having a job and a business or income from one or several businesses. (Note that if your business is a corporation, you have to file a T2 (corporate) income tax return.)
Prepare yourself by gathering your necessary papers and arranging everything you need around the computer if you are using income tax preparation software. You will need:
- Your business number
- Your social insurance number
- A copy of the Canada Revenue Agency’s Business and Professional Income Guide
- Your business records, showing your annual totals for sales, cost of goods sold and business expenses
On your T1 Canadian income tax form:
1. Fill out the Identification section (the first section) of the T1 income tax form just as you normally would.
2. The first step to figuring out your total income is to calculate your business income. To do this, you will need to fill out a T2125: Statement of Business or Professional Activities form. (This form is included in your T1 income tax form package.)
If you have more than one business, you'll need to fill out a separate T2125 form for each.
3. Use the appendix of the Business and Professional Income Guide to find out what your business’s industry code is, if you don't already know it. Then fill out the Identification section of the form.
4. Use your business records to complete the Income and Expenses parts of the Statement of Business or Professional Activities income tax form.
If your business is a partnership, you will see sections on the form for filling in details of partners and for claiming "Other amounts deductible from your share of net partnership income".
When it comes to Business Expenses:
- Are you claiming motor vehicle expenses? The form contains charts to help you calculate your “Motor vehicle expenses”, “Available Interest expense for passenger vehicles” and “Eligible leasing costs”.
- Are you making a capital cost allowance claim as part of your business expenses? There are sections on the form to help you calculate your allowable claim. Capital cost allowance is covered in depth in Chapter 4 of the Canada Revenue Agency's Business and Professional Income Guide.
- Did you operate a home-based business this past tax year? If you did, you’ll want to work through the section of the form titled “Calculation of business-use-of-home expenses”. (For more on how to do this, including examples, see Calculating the Home Business Tax Deduction.)
5. Go back to the Total Income section on the first page of your T1 income tax return. You will see a subsection titled “Self employment income” near the end of the Total Income section. Enter your gross and net business, professional, or commission income on the appropriate line.
6. Go back to the top of the Total Income section and enter all your other income on the appropriate lines. (If you have a job as well as a business, for instance, you will be entering your employment income from your T4 slips on line 101.) Once you’ve finished working through this section, you’ll have calculated your Total Income – including your business income.
7. Continue filling out the rest of the T1 income tax form just as you normally would.
There! You’re done with your first business income tax return! All you need to do now is double-check it and then file it. (See Efile and Netfile for information on fast filing options.)
Remember, if you have a balance owing, you have to pay what you owe by April 30th, even though, as a self-employed individual, your income tax return doesn’t have to be filed until June 15th.