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SMALL BUSINESS START-UP POINTERS

Many people often begin earning a supplemental income for some product or service they sell on a somewhat informal basis with no official documents, incorporation fees or other filed registration paperwork. When such income-earning activities are operated by a single person, this type of business is termed a sole proprietorship. (When more than one person is involved in the business, this is termed a partnership, which has many similarities to a sole proprietorship. For this discussion, however, we will stick to the concept of a sole proprietorship.) The requirements for running a sole proprietorship are not intentionally meant to be daunting, but there are a few items anyone pursuing such business activities should be aware of. The four points listed below are some basic items to be kept in mind for those without a business background.

  • Reporting income to the CRA: Income from your business activities is considered taxable and should appear on your annual personal income and benefit tax return [T1 return] covering the January through December calendar year. Your sole proprietorship’s revenue and expenses are reported on your T1’s Form T2125 Statement of Business or Professional Activities. At a basic level, that’s all here is to it as far as satisfying the requirements from a taxation point of view. Net Income earned from running a business is obviously taxable in the year they are earned, combined along with any other events occurring in one’s tax year.
  • Two advantages of not incorporating: At the beginning stage of many small business start-ups, running a business can mean stacking up net losses by the time all the income and expenses are added up. As a sole proprietorship, such business losses may be applied against the total income from your other income sources, including employment income if you have another part-time or full-time job, to help reduce your taxable income. This is one big reason people may choose to avoid incorporating their business. There is also the more obvious advantage of not having to file an annual corporate tax return [T2 return] with the CRA for your incorporated business in addition to your own personal T1 return.
  • Challenges of record-keeping: Despite the comparative lack of a formal business registration, one should still collect, organize, and retain records of one’s business activities, including revenue and expense invoices (if any), bank deposits, credit card charges, and all receipts. For example, one should note the name(s) and business purpose of all dinners/meals one might claim for meeting with clients. Briefly, while there exists more detail on the Canada Revenue Agency’s [CRA’s] website, a logbook should be kept if claiming automobile expenses. An important point is these records may be as simple as a summarized page with attached receipts, invoices, banking statements, etc. When a sole proprietorship’s activities begin to increase, however, these types of manually-tracked transactions begin to grow lengthier and, therefore, tedious. This is where people begin to look into options for various accounting software, which can simply recording these transactions. Keeping records and back-up evidence like receipts and statements is important in case the CRA ever questions the validity of any amounts reported on your Form T2125, often up to several years after the year in which you filed your T1 return.
  • Potential additional CRA requirements: Other major concerns include (1) GST, PST, and HST [sales taxes] and (2) employee payroll filing requirements. Briefly, for GST purposes, any business, including a person running a sole proprietorship, must contact the Canada Revenue Agency [CRA] to obtain a GST number for themselves whenever the revenue from their business exceeds $30,000. Additionally, if one decides to hire another person to work as an employee, one must contact the CRA to obtain a payroll number in order to (a) begin reporting and submitting payments to the government on the employee’s behalf and (b) issue an annual T4 employment slip for each employee. (Again, more detail on both GST and payroll requirements exist on the CRA’s website.) If the volume of transactions and/or employees is minimal, one could get away with recording these items on a spreadsheet. However, as the business transactions and payroll’s (total) amount increase, the more one may want or need to rely on accounting software. It becomes increasingly important to keep accurate and correct records of these to avoid potential penalty and interest charges levied by the CRA on GST and payroll errors. These are common, but easily avoidable, expenses too many small businesses needlessly fork over to the government.