As a small business owner in Ontario, you may have started the business because of your love for a particular type of work.
However, as you begin operating the business on a regular basis, you learn pretty quickly that you cannot focus only on the part of the business you love. When running a small business, you have to wear quite a few different hats and take on tasks that are necessary - but that you may not love.
One of those tasks that you probably don’t love is trying to calculate your small business’ tax bill. (Unless, of course, you’re running an accounting firm; then you had better love calculating taxes!)
For new small business owners, understanding your business’ income tax obligations can be quite a chore the first few times you do it. Our guide to small business taxes in Ontario aims to simplify the process of filing income taxes for your business.
Whether you have a sole proprietorship or an incorporated small business, taxes demand attention. Here are answers to the nine most common questions small business owners in Ontario have regarding their tax obligations.
Do I Need to File a Tax Return for My Business?
Yes, nearly all small businesses in Ontario need to file a return.
In the rare situation where you are self-employed in your small business with no income and no expenses during the year, then you don’t have to file any information for your small business as part of your personal tax return.
However, you still almost certainly will need to file a personal return to contribute to Canada Pension Plan and to maintain any eligibility for certain tax credits.
An incorporated small business will need to file a return every year.
What Is the Average Small Business Tax Rate in Ontario?
Here are some items to know regarding business tax rates, both federally and provincially in Ontario.
What Financial Records Do I Need to Keep for Tax Time?
When trying to decide what kinds of records to keep for calculating your income taxes, don’t overthink it.
If the receipt or bill relates to income or an expense directly for the business, track the receipt.
If you use small business financial tracking software with a companion app, such as QuickBooks Canada, or a financial tracking app alone, such as Mint Canada, you can enter your income and expenses as they occur, which is information that you will find extremely valuable when you are calculating your taxes.
Whether using an app or software, you can list notes about each expense or income line item, or you can place each item into a category. Having these items sorted makes tax time far easier than looking at a faded 9-month old receipt, trying to remember exactly what you purchased on that particular day.
What Deductions Are Available to Ontario Small Businesses?
There are quite a few tax deductions available to small businesses in Ontario, and these apply to both sole proprietor businesses and incorporated businesses.
For nearly any business, the deductions available include:
Additionally, there are expenses that could be vital to running a certain type of small business that would be deductible. For someone who farms, for example, costs for creating produce or feeding livestock would be deductible, as would costs for equipment needed to operate the farm.
There are specific rules for certain types of deductions. If you don’t meet the specifics, you cannot claim the deduction. Some categories have limits on the amount you can deduct, and others only allow you to claim a deduction when you hit a certain income threshold.
Finally, capital cost allowances are another key deduction opportunity. When you have a business that makes purchases of equipment that will wear out over time, you can deduct the cost of these items over the expected lifespan of the item.
How Can I File My Business Taxes?
To file taxes for your small business, you’ll need to determine whether you are a sole proprietorship business or an incorporated small business.
As a sole proprietorship business, you will use the T1 individual tax return. You will enter your business tax information on the T2125 form, and this form ends up as part of your personal T1 tax income.
For an incorporated small business, you’ll use the T2 tax return, which is completely separate from your personal income return on T1.
What Are Good Online Business Tax Calculators for Ontario?
If you want to estimate where your small business sits from an income tax standpoint during the year, online tax calculators can help. Because small business income tax calculation can be complex, these calculators aren’t quite as useful as they are for calculating individual income taxes, but they can provide a basic idea of where you stand.
Here are the five best business income tax calculators for Canadian small businesses.
What Are Good Tax Calculation Software Packages?
There are only a few software packages aimed at helping Canadian small businesses calculate their income taxes. Many times, you can also file your taxes electronically through these software packages, which saves quite a bit of time and simplifies the process.
Some software packages operate entirely in the cloud, meaning you do not need to download and install the software on your computer. Some software versions require a download and installation.
Expect to pay at least $25 for any of these software packages. The most expensive packages may cost as much as $250. You also may have to pay extra to electronically file your taxes.
Here are the four best tax calculation software packages:
Where Can I Find Small Business Tax Advice?
Although there are multiple web pages that have advice for Canadian small business taxpayers, you may want to start looking for advice from the primary authority, the Canadian Revenue Agency.
If you don’t mind paying for some professional tax advice, you have multiple avenues. If you hire an in-person CPA, an accountant, or an income tax firm to help you with your tax return, you will receive advice as part of the fee.
And as we discussed earlier, you can pay to receive live help with certain tax software packages.
What Are Common Tax Mistakes to Avoid?
Here are some mistakes that small business owners make on a regular basis. Avoid these, and you’ll reduce the chances of having your return kicked back to you:
