Negotiating the small business minefield
Fuelled by everything from the desire to be one’s own boss to the need to find new employment, self-employment has become a growth ‘industry’. If you are among the expanding numbers of Canadians who have chosen self-employment, you should be aware of the small business rules that can help you safely negotiate a minefield of tax and other penalties and lead you into the promised land of keeping the most of what you earn. Here are some important small business rules you need to know.
Rules for a sole proprietorship
A sole proprietorship is the simplest business structure – an unincorporated business owned by one person. You make all the decisions, get all the profits and claim all the losses. You also assume all the risks of the business – including those that extend to your personal property and assets
As a sole proprietor you:
- Must pay personal income tax on all net income generated by your business. You may be required to make quarterly income installment tax payments – if you miss them, you will pay a penalty. If you or your spouse are reporting business income on your return, it is due on June 15 not April 30 but you must pay any tax liability by April 30 or you will be assessed interest on the outstanding amount.
- Are required to make Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments on your self-employed earnings or pensionable earnings for each year. You may be required to make quarterly installment CPP/QPP payments.
- Must register for the goods and services tax/harmonized sales tax (GST/HST) if your total taxable revenues are more than $30,000 and add GST/HST to your client/customer billings. Based on the sum of your billings, you will be required to remit GST/HST amounts to the government on a regular basis.
- Must maintain adequate accounting, financial and other documents that provide sufficient details to determine your tax obligations and entitlements. In most cases, you must retain this information for six years beyond each tax year.
- May deduct from taxable income all reasonable expenses incurred to earn business income including 50 % of expenses for meals and entertainment, a percentage of your vehicle costs, a percentage of you housing costs for a home office, and so on. However home office expenses cannot be used to generate or increase a business loss.
- May be able to deduct premiums paid for personal health care and dental plans.
- Will require a separate bank account to process cheques payable to your business, if your business has a name other than your own.
There can be advantages for a self-employed person to incorporate a business – for example, a certain amount of creditor protection – and then there are partnerships, another matter entirely!
Whichever route you choose, shorten the distance to financial success by discussing your business options and personal goals with your professional advisor.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
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