People think that running a business is a great tax break because you can write off all your expenses. But thats not necessarily so. And then theres the whole business of collecting and remitting taxes, that people who dont run businesses dont have to deal with. When it comes to business taxes, ignorance is definitely not bliss; if youre not aware of the ins and outs of business taxes, and dont comply fully with the business tax rules, you can end up facing costly penalties. Hopefully you didnt fall for any of these common business tax myths:
Business Tax Myth # 1: But its not a business, really...
You may be running a business, tax-wise, and not even know it. The misconception is that making and selling a few things doesnt qualify as a business, or that if you do something as a hobby, its not really a business, even though youre producing and selling things.
The Canada Revenue Agency does not determine what is and what isnt a business by the volume of sales or by your intentions; they define a business as "any activity that you do for profit". So even if youre only making and selling a few things, you are running a business and need to file your business taxes accordingly. (See How do I report my business income?)
Business Tax Myth # 2: Small businesses dont need to collect and/or remit GST or sales taxes (PST).
This is another business tax myth based on the misperception that the size of your business matters when it comes to business taxes. When it comes to collecting and remitting GST, there is a Small Supplier exemption, but even this does not apply to all types of businesses. When it comes to PST, (also known as RST), if you are selling tangible products, you probably have to collect and remit PST. (I say probably because there are exemptions.) See How To Charge and Remit The Retail Sales Tax in Ontario for more information on how collecting and remitting RST works ( in Ontario, BC, Saskatchewan and Manitoba) and my Provincial Sales Tax library for more information on collecting and remitting PST in these and other provinces.
Business Tax Myth # 3: If you run a home-based business, you can write off all the expenses related to your home.
In a word, No. While there are some business tax deductions that are specific to home-based businesses (such as the business-use-of-home tax deduction), running a home-based business does not allow you carte blanche business tax deductions. You can use some of your home maintenance and home ownership costs as business tax deductions (see Home Business Tax Deductions for details), but generally, the rules for business tax deductions for home-based businesses are the same as for any other business.
Business Tax Myth # 4: If I operate a business, I can write off all my entertainment expenses.
If only this were true! But unfortunately, the rules for business tax deductions relating to entertainment are stringent (and perhaps stingy). Generally, you can only claim up to 50 percent of the cost of meals and/or entertainment as a business expense. (Special rules apply to meals and entertainment at conventions; see Travel-Related Income Tax Deductions.)
And when it comes to activities such as golfing, the news is even worse; club membership dues are not deductible when the main purpose of the club is dining, recreation, or sporting activities (CRA Business and Professional Income Guide).
Business Tax Myth # 5: If I operate a business, Ill be able to write off all the equipment I buy for my business.
Well, sort of. The equipment you buy to operate your business (including everything from machinery through furniture), is depreciable, meaning it will wear out over time. So when you buy what the CRA calls a depreciable property, you cant deduct the entire cost of the item as a business tax deduction; instead you deduct the cost of the item over several years through a Capital Cost Allowance claim. How much of a Capital Cost Allowance claim you can make each year for a particular item depends on what class it is. Furniture, fixtures and machinery, for instance, are Class 8 in the Other Property category, meaning that you can deduct 20 percent of their cost each year. Chapter 4 of the Canada Revenue Agency's Business and Professional Income Guide provides a Capital Cost Allowance Classes Chart that will show you what depreciable property belongs in each class. See this page of Tax Strategies To Maximize Your Business Tax Deductions for information on how to make the most of your Capital Cost Allowance (CCA) tax claim.
While business taxes are unavoidable, there are things you can do to minimize the business tax bite (such as applying these 8 Tax Strategies To Maximize Your Business Income Tax Deductions). Knowing the truth about these business tax myths will not only help you ensure that you comply with the business tax rules, but give you a starting point for successful tax planning.