Small Business Tax Facts

By RONIKA KHANNA

Navigating Canadian taxes as a small business owner is difficult.

Its normal to be nervous, but with a little help, taxes don't have to be so daunting.

 

Small Business Tax Facts: An Easy-to-Understand Guide for Canadian Small Business Owners teaches you the fundamentals and the facts about income and tax.

Keeping your business on the right side of tax collectors is easier than you think. Simple errors, oversights, and miscalculations can result in costly audits and/or fines. Don't let that happen to you! Learn how to navigate taxes, pay only what you owe and on time and save your hard earned money by claiming the deductions that you are entitled to.

 

Inside this comprehensive and helpful guide for unincorporated business owners, you'll learn about:

• A comprehensive list of business expenses and deductions with examples
• income tax
• tax brackets and rates
• the differences between employment tax and self-employment/small business tax
• how to register for an online CRA Account
• the difference between tax deductions and tax credits and how to maximize them
• the essentials of small business accounting
• how to prepare and file your business income tax return
• how to prepare your sales tax (GST/HST) returns
• and so much more!

Discover insider secrets, tools, techniques, and must-know information from author Ronika Khanna CPA, CA, & CFA, and learn to navigate Canadian small business taxes with ease with Small Business Tax Facts: An Easy-to-Understand Guide for Canadian Small Business Owners.

When I was starting my business, I only knew about the taxes I had paid as an individual consumer.  Setting up tax accounts with the government was something I didn't really understand, and I ended up paying a bunch of penalties and interest.  

 

Review:

This book really lays things out clearly.  I wish I'd had it when I started!  I also found that there were deductions that I wasn't taking, and so this year I paid less tax than last year, even though my business was more profitable. 

I strongly recommend buying this book if you operate your own business.  The explanations are clear and complete, the step-by-step guides to government forms easy to follow, and the language is aimed at regular people--you don't have to be a lawyer or accountant to get it!

 

• Language: English
• Publisher: RONIKA KHANNA
• Release date: May 31, 2021
• ISBN: 9781777443931

RONIKA KHANNA

My name is Ronika Khanna. I am a Chartered Professional Accountant (CPA, CA) and Chartered Financial Analyst (CFA). I started my career in Montreal and then moved to Bermuda where I worked as an accounting professional for two multinational firms, in the investment and reinsurance industries. After 7 years of being on a lovely, but tiny island with perhaps an excessive amount of humidity, I decided to move back to Montreal. where I immediately took a job as the Controller for a company, that has now gone public.   While my job was interesting and fulfilling, I realized that I derived greater satisfaction from working with small businesses independently which allowed me to directly participate in their success. In 2008 I decided to quit my job and launch my own small business as an accountant and financial consultant to other small businesses. Establishing yourself when you are a new and unknown business is always difficult, but I enjoyed the challenge. I started blogging in my spare time and was open to almost any opportunity that came my way. This helped me gain experience , establish credibility and focus on the areas where I could provide most value. It has been an exciting journey and over the past 10+ years I have been fortunate to have helped a diverse clientele better understand their finances, improve their financial confidence and boost their business profitability.

Book preview

Small Business Tax Facts

An Easy to Understand Income and Sales Tax Guide

for Canadian Small Business Owners

Ronika Khanna CPA, CA, CFA

Copyright © 2021 by Ronika Khanna

ISBN: 978-1-7774439-3-1 All rights reserved.  No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law.

Disclaimer

The author of this Ebook and the accompanying materials has used their best efforts in preparing this Ebook.  The author makes no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the contents of this Ebook.  The information contained in this Ebook is strictly for educational purposes.  Therefore, if you wish to apply ideas contained in this Ebook, you are taking full responsibility for your actions.

Table of Contents

Understanding Income and Tax

What Is Income Tax?

Tax Brackets, Average Tax Rates, and Marginal Tax Rates

What Are The Different Types of Income?

Employment Income

Income from Self-Employment

Investment Income

Pension and Other Income

Non-Taxable Income

What Is a Tax Deduction vs a Tax Credit?

Notable Tax Deductions

Common Tax Credits

Why You Should File a Personal Tax Return

Why You Should Register for an Online Account with CRA and How to Do It

Benefits of Registering for My Account

How to Register for My Account

How Small Business Tax Is Different from Personal Tax

Common Tax Mistakes that Affect Your Bottom Line

Accounting and Your Small Business

Should You Do Your Own Accounting?

What Type of Accounting System Should You Use?

What Is a Profit-Loss Statement and How Do You Do One?

How to Prepare and File Your Business Income Tax Return

What Types of Businesses Are Required to Prepare a T2125?

What Kinds of Documentation Do You Need?

What Are Your Options for Preparing the T2125?

Best Practices for Preparing Your Tax Returns

How to Complete the T2125

Part 1 - Identification

Part 2 – Internet business activities

Part 3A – Business income / Part 3B – Professional income

Part 3C – Gross business or professional income

Part 3D – Cost of goods sold and gross profit

Expenses and Deductions: Part 4 – Net income (loss) before adjustments

Part 4 Special Cases

Part 5 - Your net income (loss)

Part 6 - Other amounts deductible your share of net partnership income (loss)

Part 7 – Calculating business-use-of-home expenses (aka Home Office Expenses)

Part 8 – Details of other partners

Part 9 – Details of equity

How to Calculate CPP Contributions if You Are Self-Employed

What Is CPP?

How Do CPP Contributions Apply to the Self-Employed?

What Is the CPP Contribution Calculation for Self-Employed Workers?

How and When to Pay Your Income Tax

How to Make Payments

Income Tax Deadlines

Penalties for Late Filing

CRA Payment Arrangements

What Are Instalments?

How Are Instalments Calculated?

What Are the Instalment Due Dates?

What Happens if You Do Not Make Instalments?

What You Need to Know about Sales Tax

How and When to Pay Your Sales Tax

What Type of Information Is Required on a Sales Tax Report?

How Do You File a Sales Tax Return and Pay the Amount Due?

Sales Tax Deadlines

Penalties for Late Filing

How Are Instalments Calculated?

Why You Should Register for an Online Business Account with CRA and How to Do It

Benefits of Registering for My Business Account

How to Register for My Business Account

Appendices

Appendix A: Guidelines for Deducting Conference And Training Expenses

Conferences/Conventions/Seminars

Training Expenses

Appendix B: Are Clothing and Other Personal Attire Costs Tax Deductible?

Appendix C: Tax Treatment of Computer Hardware and Other Fixed Assets

What Is Depreciation?

What Is the Tax Treatment of Fixed Assets?

Common CCA Classes and Rates

Appendix D: Sales Tax in Other Provinces

British Columbia (B.C.) Provincial Sales Tax (PST)

Manitoba Provincial Retail Sales Tax (RST)

Quebec Sales Tax (QST or TVQ)

Saskatchewan Provincial Sales Tax (PST)

About the Author

Reviews

Other Books by Ronika Khanna

Understanding Income and Tax

Income tax in Canada was presented as a temporary measure to help finance the significant costs of World War I. It was introduced in 1916 on business profits and extended in 1917 to all individuals whose income exceeded a certain amount. Prior to the introduction of income tax, government revenues came from duties, excise taxes, and revenues from the postal service. Although income tax remained in place, it wasn’t actually made permanent until 1949.

Income tax has become significantly more complex since its introduction over 100 years ago. The original tax act was only 10 pages long, while it now stands at over 3,500 pages. The income tax act is a weighty tome that takes many years of education and practice to understand and parts of it are still incomprehensible to many accountants and tax professionals (and Revenue Canada agents). So, while it would seem challenging for the average layperson to try and understand, the fundamentals of tax as they apply to most individuals and small business owners are actually pretty straightforward. Whether or not you do your own tax return, it is my belief that all Canadians should be familiar with the basic concepts of tax as an essential component of understanding their financial situation. As an accountant for many years, I have encountered much anxiety around the topic of tax. I have written this book in an attempt to explain some of the fundamental concepts of tax as they apply to individuals and small business owners.

What Is Income Tax?

Income tax, very simply, is a tax imposed by the government that is based on an individual or business’s income. The purpose of income tax is to generate revenues to fund numerous services and projects, from healthcare to building roads. The complexity arises in how the amount of that income is determined and what type of tax rates apply. Different sources of income are treated differently for tax purposes, while different levels of income have different tax rates. Canada has a progressive tax system, which means that not every dollar of income earned is treated equally. Rather, taxation rates gradually increase as your income increases, which means that those who earn more not only pay a greater amount of tax in number of dollars, but they also pay a higher rate of tax in percentage of income. For example, all things being equal, someone earning $100,000 will pay more than double the amount of tax that someone earning $50,000 pays.

Tax Brackets, Average Tax Rates, and Marginal Tax Rates

In order to understand the progressive tax system, you need to first understand the concepts of a) tax brackets, b) average tax rate, and c) marginal tax rate.

Tax brackets are a set of ranges that indicate the amount of tax you will pay on income earned within that range. An analogy would be a series of buckets. Your income fills the first tax bracket up to a specified amount. Any income earned in addition to the first tax bracket is then put into the second tax bracket, which is also capped at a specified amount. This goes on until either your income has been fully allocated or you reach the top tax bracket, which has no upper limit.

Example:

Donna earns a salary $100,000 as a web developer for the Canada Computer Company. She lives in Ontario and is single. She has no other sources of income.

If Donna lived in a country which used a flat tax system with a rate of 20%, she would simply pay tax of $20,000 and be done with it.

In Canada, which uses a progressive tax system, Donna’s income of $100,000 falls into several tax brackets as follows:

Of the $100,000 of income that Donna has received in 2020, $48,535 fills up the first bucket for which she is taxed at a rate of 15% for $7,280.25.

The next bucket fills up with $48,534 of income which is