As Canadians wrap up their personal income tax filings, it’s time for small business owners to focus on preparing their taxes as well. The deadline for self-employed individuals to file tax returns is June 15, 2022, and payment is due on May 2. For those with incorporated businesses, the filing deadline is six months after the end of the business’ fiscal year. However, all corporate taxes owed are due three months after the fiscal year-end.
Like last year, those who received COVID-19 government supports for their businesses will have to factor these benefits into their tax filings. Self-employed individuals are to report business income on the T-2125 form, which must be filed as well in addition to the standard T1 individual income tax return.
Below are six tips that can help you with your small business tax return.
- Review your COVID-19 government benefits
Unless your business is an income tax-exempt entity, such as a registered charity or a non-profit organization, any COVID-19 government benefits you received are taxable. This includes the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS), Canada Recovery Hiring Program (CRHP), Tourism and Hospitality Recovery Program (THRP), and Hardest-Hit Business Recovery Program (HHBRP).
All COVID-19 supports must be included in your income tax return for the tax year (fiscal period) in which you received them. As taxes for these benefits were not withheld at source, recipients will owe taxes unless their organization is exempt.
The way you report a rent subsidy on your tax return will depend on the type of entity your business is (incorporated, sole proprietorship, trust, or income tax-exempt). Business owners are encouraged to refer to the Government of Canada’s COVID-19 rent and property expense support for businesses site for detailed information.
- Remote working and other expenses
Last year, the newly launched temporary flat-rate method allowed individuals who worked from home due to COVID-19 to claim up $400 in remote working expenses as a tax deduction. This year, that amount has increased to $500. The temporary flat-rate method does not require any documentation of expenses or submission of additional forms.
For individuals who incurred significant remote working expenses, they still have the option of using the traditional method, known as the Detailed Method. Using this method, individuals may be eligible to claim funds beyond the $500 maximum for the temporary flat-rate method, but will require additional details. Here is where you can access further information on how to claim your work-from-home using either the Temporary Flat Rate Method or the Detailed Method.
Small business owners are also eligible to declare other expenses, as (generally speaking) any expense incurred for the purpose of earning income is tax deductible. Common examples can include vehicle and gas, contract labour, renovations and repairs, and insurance expenses. Tax credits can also be applied to investments, hiring apprentices, as well as scientific research and development.
There are also a number of grants available that your business may qualify for. For example, the Canada-BC Job Grant provides tax credits for employers who support their employees in completing professional development and certification training programs.
- Retain your records
As a business owner, you are responsible for retaining documentation of all business expenses for a period of six years from the end of the last tax year they relate to. These records include copies of financial statements, tax returns, invoices, receipts, cheques, as well as credit card and bank statements.
It’s recommended that you digitize as much of your documentation as possible for a number of reasons. For example, all records must be legible. The ink from paper documents such as receipts and invoices can often fade over time.
Many service providers such as retailers and restaurants now offer the option of emailed receipts. Inevitably, there will still be times when only a paper receipt is available to you. In these instances, you can take a photo and upload it into your computer system. There are many apps available that can not only upload images of your receipts, but can also help you file and manage these documents.
- Find out if you qualify for the Small Business Deduction
The Canadian tax system has been designed to provide certain benefits to Canadian controlled private corporations (CCPC). If your business is incorporated, it may be entitled to claim the small business deduction (SBD) on the first $500,000 of active business income. When calculating the SBD for your incorporated business, you need to factor in both federal and provincial tax rates.It’s important to note that the $500,000 limit must be shared with any company associated with your CCPC, but your group of companies may decide how to allocate it.
According to the specified corporate income (SCI) rules, corporations will not be able to claim the small business deduction on any active business income earned from another corporation where there is common ownership. However, the non-associated private corporation may be allowed to assign a portion of its $500,000 business limit to the CPCC in certain situations.
- Be strategic about your capital cost allowance
The Capital Cost Allowance (CCA) allows you to write off a percentage of your depreciating capital assets each year. A capital asset (also known as a fixed asset) is a type of property you acquire for your business that has a life expectancy that exceeds one year. Examples include vehicles, electronics, machinery, equipment, land and buildings.
An example of a depreciating capital asset is a vehicle. Each year, you can deduct a percentage of its cost from your tax return, and this percentage is calculated according to a rate the Canadian Revenue Agency has assigned to different types of property, while also taking into consideration a property’s value. Because your capital asset is depreciating, the calculation is structured so that each year, your CCA deduction will also decrease accordingly.
For your tax filing next year and beyond, note that maximum CCA amounts for passenger vehicles purchased on or after January 1, 2022 has increased from $30,000 to $34,000 and from $55,000 to $59,000 for zero-emission passenger vehicles.
Budget 2021 proposed to allow the immediate expensing of certain property acquired by CCPCs if the eligible property was acquired after April 18, 2021 up to January 1, 2024. However, the CRA will not allow the immediate expensing deduction until the legislation is introduced in the House of Commons as a Bill. At that time, the CCPC will be required to amended the return to claim the deduction.
- File your taxes on time
Lastly, one of the keys to ensuring you file your business’ tax return on time is to stay organized and on track throughout the year. For example, you can schedule reminders in your calendar to pay your taxes each quarter. If you file your return late, a 5% penalty fee will apply on any unpaid taxes due, plus 1% of this unpaid tax for each complete month that the return is late, up to a maximum of 12 months.
Running a small business comes with a lot of responsibilities and filing your tax corporate tax return is a major one. However, the tips listed above can help guide you onto the right track, as well as access some of the benefits that may be available to you. If you would like more information, we recommend that you contact a CPA.
Bilal Kathrada, CPA, CA, is a partner at Clearline Chartered Professional Accountants specializing in income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal is a volunteer of the CPABC Taxation Forum and CPABC’s media expert on RRSPs and income tax filings. Visit CPABC’s RRSP & Tax Tips site for more tips.