Small Business Taxation: A Quick Guide For Startups

So you have finally considered taking the legal business aspect of making your ideas real. You probably are contemplating registering your business any time soon, but unsure of the tax matters involved in the long run.

Whether as employees or as business owners, we need to contribute to the government’s funds by paying taxes. Personal income tax, corporate income tax, sales taxes, property taxes, tariffs, duties–they all vary in financial technicalities, but all point to our financial contribution to our government programs in social services, public safety, and everything in-between.

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Starting a business means facing the reality of much more taxation concerns than as a plain employee for a business. Preparation of tax is one of the headaches in the business. As a soon-to-be business owner, handling tax preparation may be difficult. Some small businesses overlook preparing and paying taxes on time. Consequently, they ended up getting a penalty. The good news however is that there are bookkeeping and accounting firms that specialize in small business taxation. These firms make things go smoothly when it comes to tax preparation.

What is referred to as a small business in Canada?

Industry Canada defined “small business” as firms with fewer than 100 employees as a manufacturing business or 50 employees as a service-producing company with annual income below C$500,000. These are firms with business identity as sole proprietorships and partnerships. Take note that certain taxation rules for small businesses also apply to self-employed individuals, including those earning income from commissions.

How are small businesses being taxed in Canada?

Every business must report their earnings, including the kinds of income. Technically referred to as business income, it should include money you earn from a profession, a trade, manufacture or undertaking of any kind, an adventure or concern in the nature of trade, or any other activity you carry on for-profit and there is evidence to support that intention. Business income does not include employment income, such as wages or salaries received from an employer.

As with other countries, small businesses pay lower tax rates than corporations do. In Canada, the small business tax rate is pegged at 9% of taxable income. This has been in effect since January 1, 2019. Prior to that, it was at 10.50% then changed to 10.00% effective January 1, 2018. as of 2019. The general corporate tax rate is 28%. However, each province or territory operates its own corporate tax system, with varying treatment for small businesses.

The Ontario General corporate income tax rate is currently 11.5%. The Ontario small business deduction (SBD) reduces the corporate income tax rate on the first $500,000 of active business income of Canadian‑controlled private corporations (CCPCs). Effective January 1, 2020, the lower rate of Ontario corporate income tax is reduced from 3.5 percent to 3.2 percent.

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What are the best practices in tax preparation for small businesses?

Here are some best practices for tax preparation for small businesses:

  • Complying with the local taxation regulations
  • Regular CRA audit submission
  • Using the latest tax accounting software application
  • Knowing the difference between gross and net income
  • Recording important payable and receivable transactions
  • Segregating business and personal expenses
  • Maintaining clear and adequate financial records
  • Work with accounting people with a specialty in tax preparation. Apply the expert advice from your tax accountant.

We can’t stress this enough: Consult a CPA experienced in business income tax when you start your business! Yousri Ahmed can assist with your taxation needs. He offers tax services for small businesses in Mississauga, Vancouver, and Toronto. Get in touch with thru or phone 647-991-8381. You can also leave your inquiries on our website contact page.