Running a successful business takes drive, innovation, passion and ... wait for it ... organized bookkeeping! That wasn't what came to mind, was it? Most Canadians don't dream of owning their own business so they can handle payroll and complicate their income tax return.
Perhaps too many TV shows glorifying entrepreneurship have led us to believe that all it takes is a great idea and determination. The reality is, there are a lot of factors you have to take into consideration. We're not saying you need to be an expert in accounting to run a business, but you do need to be aware of what your accounting needs are year-round and during tax season.
Spend money to make money
We forgot to mention that in addition to drive, innovation and passion, you'll also need money to start your business. And likely a large chunk of it. The good news is you can claim business expenses on your tax return. The bad news is you can't claim any expenses you incur before you actually start the business, so it's best to minimize business expenses until you are up and running.
What type of business are you? It will affect your taxes
Decisions, decisions! It all starts with the you plan to launch. We don't mean what will your business's "culture" be like — whether you'll offer free lunches, in-office massages and sleeping pods — we mean what type of business structure you'll have. Whether you choose to be a sole proprietorship, partnership or corporation will affect how you report your business income and the type of tax returns you have to complete. Let's break it down:
- Sole proprietorship: This type of business structure is unincorporated and owned by one person – that's you! You have the sole responsibility for making decisions (and assume all the risks). How does this affect your taxes? You'll report all business revenue and claim expenses on your usual T1 income tax and benefit return. Easy.
- Partnership: This structure involves a relationship between two or more people (aka partners). Each partner contributes and is entitled to a share of the profits and losses. In this case, each partner will include their share of the partnership's income on their personal income tax return. Slightly more complicated.
- Corporation: If your business is a corporation, it's a separate legal entity and has a separate name that is distinct from yours. What are the tax implications? Corporations must file a separate income tax return called a T2 corporation income tax return, prior to six months after the end of every tax year. And that's as complicated as it gets.
Making it official with the CRA
Did you think you only had to deal with the CRA during tax season? Not quite. If you're launching a business, you'll want to consider registering for the and for a business number (BN) with the government:
Here are the different CRA program accounts:
- GST/HST program account: If you expect your business to earn more than $30,000 during the year, you're required to register for a GST/HST account and must start charging clients GST/HST for your services. If you aren't sure whether your business will take off in its first year (fingers crossed that it does), you'll have 29 days to make it official with the CRA as soon as you hit $30,000 in sales.
- Payroll program account: If you aren't planning on running your business solo, then you'll need to hire employees. With employees come extra responsibilities. You'll need to remit payroll deductions for income tax, CPP contributions and EI premiums. You should register for a payroll program account before your first remittance due date. You'll also need to file a T4 information return and issue T4 slips to your employees by the end of February each year.
- Import-export program account: if you're importing goods into Canada or exporting goods to other countries, you'll need to register for an account to help process customs documents.
Preparation and organization is needed year-round
You'll likely have heaps of paperwork and receipts — it's a fact of life for the small business owner. Keeping your records organized will keep you sane. You're required to keep your accounting and financial documents, like your sales invoices, contracts, bank deposit slips, bank statements, cash register slips, credit cards receipts, work orders, logbooks, ledgers ... please don't make us list them all! These records should be kept for six years, in case you're audited.
Being a business owner is rewarding, but it's also hard work. It's wise to surround yourself with experts who can help, from seasoned mentors, to other entrepreneurs to tax experts.
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