As a small business owner in Ontario, there will be a day when you must confront the often-dreaded duty of math. That day of math, also known as filing your taxes, can be a daunting task, especially for businesses under sole proprietorships and small enterprises. Where do you begin with your taxes? What’s the best software to use? Do I need to pay tax instalments?
These are some questions that we address in this guide.
First, let’s get something straightened out: not all small businesses are created equal. Some enterprises can operate without being incorporated, like if you happen to be self-employed or are the sole proprietor of your business. The necessary taxes to file are different.
Second, you have up to six months to file taxes for the previous year. It is important to stay on top of them, otherwise you may find yourself penalized by the Canada Revenue Agency (CRA).
Your business is as unique as you, and this can add an extra layer of confusion while doing taxes. The experts from T2inc have put together this complete guide on the Ontario tax rate for small business owners.
Do small business owners need to file a tax return in Ontario?
The short answer is yes. Most small business owners need to file their taxes annually.
All incorporated small businesses need to file a tax return every year.
The long answer is maybe. The rare exception of not having to file business taxes would apply to those business owners who are self-employed sole proprietors and who had no expenses and no income during the taxable year.
But don’t forget that you will most certainly need to file your own personal T1 taxes!
Generally, you must file your T2 business tax return no later than six months after the end of the tax year. The taxation year of your business is determined when you filed for incorporation and declared when your fiscal year begins and ends.
If you only need a T1 to file as a sole proprietor, you have until the end of April to file the previous year’s tax report.
What is the small business tax rate in Ontario?
The tax rate for any small business in Ontario ranges on the income level of the business. These are some things that you need to know for both federal and provincial tax rates in Ontario:
- Provincially: Incorporated small businesses in Ontario have an income tax rate between 3.2% and 11.5%. The lower your income level, the lower the annual rate will be. This rate may change from year to year.
- Federally: Incorporated small businesses in Canada have a tax rate of 9% for the first $500,000 of income.
- Self-employed persons have a rate equal to the individual tax rate that ranges based on income. The provincial rate ranges between 5.05% and 13.16%, and the federal rate ranges between 15% and 33%.
If you are a sole proprietor in Ontario, you do not need to register your business for GST/HST if you do not exceed a $30,000 threshold of income over a calendar quarter. Consider using what the CRA uses already for time allocation. Use March 15, June 15, September 15 and December 15 as a due date for quarterly tax assessments and payment instalments. Once you exceed the $30,000 threshold, you must register your business to collect GST/HST taxes from your revenue.
It is recommended in the industry to set about 25% of your annual income aside for tax purposes. This may seem like a large chunk of your budget, but it helps facilitate lump sum payments rather than adjusting for payment instalments if that applies to your business situation.
What accounting records do you need to keep in Ontario?
The accounting records that you need to keep and archive are income records, expense records, company vehicle records, and property records.
Throughout the year, you may have kept the receipts for your business expenses. It is recommended to track your annual expenses as they arise during the fiscal year just like you should track your income as they arrive.
If you’re asking yourself: “But where did that T2XYZ paper go for my business?” Don’t panic, there are ways to locate your accounting records. Head over to your My Business Account at the CRA sign-in service, log in and toggle over to the Documents on file tab. Voila! You can access a variety of records here from GST/HST to payroll information on file.
However, all income expenses and possible business deductions evidence is your responsibility to manage. Again, using software throughout the year is ideal to keep everything tracked and recorded.
Collect all your invoices, dossiers, business receipts, bills, and stubs. We recommend you make categories for each expense as you add them together. These are all the documents you need when doing your small business tax reporting:
- Income records: This includes sales invoices, cash register tapes, receipts, bank deposit slips, fee statements and contracts.
- Expense records: Each receipt or invoice must have:
- Date of the purchase
- Name and address of the seller or supplier
- Name and address of the purchaser
- Description of the goods and/or services rendered
- The vendor’s business number if they are a GST/HST registrant
- Company vehicle records: For company vehicles, keep a logbook for all business-related trips by including:
- Date of trip
- Business purpose
- Number of kilometers driven
- Property records: This is for the sale or acquisition of new property which must include:
- Date of the sale or trade
- Amount of the payment or credit from the property exchange
- Property address
It is recommended to digitize your records wherever possible because printed receipts do fade overtime. The CRA recommends that you hold onto your previous tax records for at least six years.
How to file small business taxes in Ontario
In order to file your taxes for your business, you need to know the structure of your enterprise.
If you are a sole proprietor (someone who individually owns a business that is not incorporated), you use your personal taxes to file for your business. You will use your T1 tax form and use the T2125 form to complete your business taxes. This means that your business tax return is lumped into your personal tax return.
If you are an incorporated business, your tax reports are separate. You use your T2 tax form to:
- Declare your expenses for the business year
- Enter your income for the business year
- Calculate your taxes based on your net income
- Make a payment or request your refund
If you are reporting taxes for a trust enterprise, you would use the T3 tax forms. This information is not covered in this guide.
For all tax returns for small businesses whose income is under $1 million, you have the option of filing your taxes online or mailing them in print. You can mail your paper tax return to the CRA directly. It is mandatory for most businesses with an income over $1 million during the taxation year to file digitally.
How to calculate small business tax in Ontario
There are technically three methods to calculate your small business tax return:
- Use a previous year’s tax assessment if the income and expense levels are the same. If you use the same software year-to-year, this is easy to import that data.
- Use the last year’s tax assessment if the income and expense levels did not change. Using the same software makes this method to calculate your taxes easiest.
- File a new tax return using the T2 forms for incorporated businesses or T1 forms for sole proprietors. New businesses and growing businesses alike, if you cannot import and use a previous year’s data, you can always start fresh.
To calculate small business tax in Ontario and find your net tax owing, using software and filing online is a step-by-step process.
You may be thinking, “but what software should I be using to file my taxes?” There are dozens to choose from. Here are five great tax calculation software for Ontario small businesses:
- Intuit TurboTax Canada: a software that can streamline taxes if you use this software year-to-year for a small fee. It is good for those small businesses whose net income doesn’t change drastically year by year.
- TaxTips: a software that lets you see comparative tax calculations of up to 20 tax returns filed in one year and it has a free option. You cannot file a Quebec tax return nor a corporate tax return. This is perfect for sole proprietary small businesses.
- Wealthsimple: a software that joined forces with SimpleTax to provide small business owners with tax tips and filing. For a small fee, this is good for incorporated small businesses and self-employed business owners.
- SimpleTax: a software that makes e-filing a breeze and has a free option. This is good for sole proprietors filing a T1 tax form because it doesn’t handle corporate tax.
- CanTax: a software that lets you file multiple tax returns for one year and has a built-in easy-to-use navigation feature. They do charge differently between a T1 and a T2 tax report. This software is perfect for growing small businesses with complex dossiers.
- T2inc: a software that we adapted to fit the needs of Canadian businesses. We offer comprehensive tax support for incorporated businesses no matter the size of your enterprise. We specialize in T2 and CO-17 taxation forms and can help you at every step of your filing. Our taxation software is user-friendly for even the most complex corporate tax returns for small Ontario businesses needing to find their net tax owing.
Once you find the software that’s right for your business structure and assessment needs, calculating your net tax is already underway!
To put it simply, your net tax owing is the amount of money you owe on your income tax return. It is important to ensure that you have claimed all available deductions to you. Common deductions include:
- Home office expenses
- Certain mileage from a business vehicle
- Accountant or bookkeeping fees
- Office supplies
- Business meals
- Small business deduction
- Utilities for running the business
- Advertising expenses
- Conventions and trade shows
- Charitable donations
To calculate if your small business needs to pay by instalments or as a lump, there are some small factors to consider. For Ontario businesses, and all residents except Quebec residents, you may make instalment payments if your net tax owing is more than $3000. For Quebec residents the net tax owing is $1500 before payment instalments are arranged.
The due dates for tax instalment payments are March 15, June 15, September 15 and December 15.
To calculate instalment payments, follow this chart:
You can make these payments easily online through your business’ financial institution. It takes roughly 3 business days for an online payment to go through and about 10 business days for a payment by cheque or money order to be processed. You can view payments received and subsequent due dates by logging into your Business Account on the CRA website and navigate to “Accounts and Payments”.
The typical turnaround time for a tax report to be assessed by the CRA is within 6 weeks if you file online. If you have some deductions to claim for the year’s taxes, it may take longer to assess appropriately. For example, an advertising deduction claim for digital media may delay your tax assessment by up to eight weeks once filed.
There’s a lot of information to keep track of. It is recommended that small Ontario businesses filing their corporate tax returns use a third-party tax accountant to ensure that your expenses are in order and that all possible deductions are claimed.
Where to find help with small business taxes in Ontario
We hope that this guide provided you with some resources to better help you prepare for the upcoming tax season. To ensure that you have the most accurate and up to date information, using professional bookkeeping and accounting services is ideal.
The professionals at T2inc have years of experience in assessing tax records to help small
Ontario business owners report their T2 taxes, making their tax assessments and giving expert tax advice.
Contact us today to get ahead of your competition with expert T2 tax advice.
The information in this article is subject to change as tax rules continually shift and change overtime. For the most up to date information, contact the tax experts at T2inc for ease of mind.