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.
- For incorporated small businesses, Canada’s federal tax rate for small businesses recently dropped from 10% to 9% up to the first $500,000 of income.
- In Ontario, the incorporated small business provincial income tax rate ranges between 3.2% and 11.5%. Businesses with a smaller income level will pay closer to the lower rate. These rates could change from year to year.
- Self-employed individuals pay a rate equal to the individual tax rate, which currently ranges between 15% and 33% federally, depending on the amount of income, and between 5.05% and 13.16% 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:
- Use of a vehicle for business
- Use of an office building
- Use of a home office space
- Office supplies and postage
- Hardware and software
- Meals and entertainment for clients
- Costs of utilities for running the business
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.
- Enter your expenses for the business
- Enter your income for the business
- Calculate your owed taxes, based on your net income
- Make a payment or determine how you’d like to receive your refund.
- You almost certainly will be able to file your forms electronically, although you also have the right to print your forms and mail the paper copies.
- Calculate the tax instalment payments you’ll need to make for the following year if you are incorporated or if you are self-employed.
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.
- Calcul Conversion: For those who are self-employed, the Calcul calculator can help you make an estimation about your tax situation, including what you may owe at the provincial level in Ontario.
- Credit Finance Plus: The CFP calculator is especially helpful for those who have incorporated businesses.
- SimpleTax: The SimpleTax calculator is easy to use, and it includes information for the self-employed.
- TaxTips: Self-employed individuals will be able to make surprisingly accurate income tax calculations with the TaxTips online calculator.
- TurboTax: This calculator from TurboTax helps you determine your potential tax savings, based on the amount of expenses you plan to claim.
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:
- Cantax: Although Cantax is primarily designed for those who help other people calculate their taxes for a living, individual small businesses can use it too. If you have a few side hustles, where you need to fill out multiple T2125 forms, Cantax is a nice option. Cantax also has a version aimed at incorporated small businesses.
- Intuit TurboTax: Most small business owners will need to use either the Home & Business version (for sole proprietorship businesses) or the Business Incorporated version of this highly popular tax software package. Intuit offers live help for an additional fee, so you can ask questions of support personnel while completing your taxes.
- TaxTron: TaxTron has a Corporate version for incorporated small businesses. For your self-employed business, you probably will have to use the Family version, unless you have very little income, upon which you can use the free Individual version.
- UFile: Those who have a simple T1 or T2 return will find the greatest level of success with UFile. Those with complex small business tax situations may not find enough detail here.
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.
- Checklist for new small businesses. As you start your small business, CRA has a checklist to help you understand all of the small business tax forms you need to complete.
- Understanding sole proprietorships. If you are confused as to whether you qualify as self-employed for tax purposes, CRA explains the criteria clearly.
- Understanding tax rates. CRA publishes federal and provincial tax rates for self-employed individuals, and provides an online calculator to help you make an accurate estimate.
- Calling for help. If you prefer to speak with someone at CRA about your tax question for the self-employed, you can call for help at certain times of the year.
- Questions via web form. CRA maintains a step-by-step online question form that may help you obtain information about your small business tax question.
- Go to a free tax clinic. CRA puts on clinics that provide in-person and virtual tax help throughout the year for self-employed individuals and tax seminars for incorporated small businesses.
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:
- Skipping filing a return when you lose money. Sometimes, your business will lose money. It happens to the best of businesses on occasion. For a sole proprietorship, you can use this business loss to reduce the overall income claimed on your taxes. For an incorporated business, you may be able to roll that loss into a future year.
- Not considering yourself a sole proprietorship. If you make money in a side hustle, you are self-employed for that income, and you need to claim it on Form T2125. Things like driving a rideshare vehicle, a weekend lawn care business, or renting space to others in your home all are types of self-employment when you generate income.
- Guessing on receipts. As we mentioned earlier, you need to keep close track of your receipts throughout the year. If you guess on expense receipts on which the Canada Revenue Agency later requests more information or proof, it will reject your “guesses,” and you’ll end up owing more in taxes. Accurate record keeping is a must as a small business owner.
- Not having a GST/HST number. Because small businesses do not need to apply for a GST or HST account number until they reach an income threshold, some businesses that experience an unexpected growth in income in a year may not apply for the HST or GST in time. Do some projections about your expected income, and if you think you will hit the threshold, proactively apply. It’s better to have a GST/HST number and not need it than to not have one and find that you need it.
- Using an incorrect form. The Canada Revenue Agency maintains a list of all income tax forms from current and past tax years. If you are filing taxes, always use only the current year form. Items on the form can change slightly from year to year, so you cannot use an old form to file your current year taxes.
- Not asking for help. Taxes can be complicated for an individual taxpayer in Canada, and they become even more complex for a small businesses. To further complicate things, tax rules often change from year to year. Don’t guess if you’re unsure about filling out your return. Look for some free help from the CRA, use a software package, or hire a tax professional if you want to be sure that you’re correctly filing your return.