Monthly Archives: July 2014

Paying Yourself – Small Businesses in Canada

Most small businesses are just that – small.  Many entrepreneurs start operations with just themselves as principals, and do so as a way to make money while controlling their own destiny.  One of the most confusing challenges that face new business owners is the question of paying themselves – there are a number of ways to set up your business, and each has it’s own advantages and disadvantages.

Types of Businesses

The Canada Revenue Agency defines a business as “a profession, calling, trade, manufacture, undertaking of any kind whatever or an adventure or concern in the nature of trade.”  The business must be entered into with the intention of making a profit, and there must be evidence to this effect.

Sole Proprietorships

An operation with only one worker, the principal, is called a “sole proprietorship”.  Sole proprietors report all of the profits of their undertakings (after deduction of costs, which can include all money spent in the operation of the business) as personal income, and are taxed accordingly.

Partnerships

Small businesses with more than one principal, who share in the expenses and profits, are referred to as “partnerships”.  Each partner is responsible for reporting their portion of profits and expenses on their personal tax returns. The business itself doesn’t file a return with the CRA.

Corporations

Businesses that are incorporated, on the other hand, are legal entities that file their own taxes.  In the case of incorporation, business owners can be employees of the corporation, and collect a paycheque (subject to the same advantages and disadvantages as being employed anywhere), or can elect to receive compensation in the form of dividends.  There are several factors that determine which way you should choose to be paid by a corporation in which you are a principal, most of them centering around deductions of the CPP.

Whichever way you choose to go, know that Canada’s Western Provinces are a hotbed of small business activity, and that they truly are the engine that drives the economy.  For solid advice and help with accounting and bookkeeping, contact Five Star Accounting for professional service with a personal touch.

What Constitutes a Business Expense?

The Canada Revenue Agency very clearly lays out the rules for business expenses.  Most simply put, a business expense is anything that your business paid for that can be considered a “cost” that is paid in order for your business to earn income.  Eligible business expenses are then deducted or “written off” of the businesses profit, so that income tax doesn’t need to be paid on them.

What are tax deductions?

The CRA has a very detailed list of appropriate expenses, which you must consult before considering deducting from your business income.  If you operate your business from your home, you can deduct a portion of your home costs proportional to the space used for operation of your business.  You may deduct advertising, bad debts, postage, and a whole host of other costs directly related to the earning of business income.

Many business owners try to stretch the definition of a business expense.  Because you are allowed to deduct meals and entertainment expenses, and travel costs, they will submit personal receipts assuming that the Canada Revenue Agency will be unable to tell the difference.

The government has a lot of experience with business deductions, and a large number of the people employed by the CRA are tasked with sniffing out deductions that are less than genuine. The rules concerning documentation around entertainment, travel, food, and vehicle expenses are quite strict.  If you bend the rules, you are very likely to be caught.

Our advice to you? Ensure that your deductions are in compliance, and keep careful records.  Ask yourself, before including an expense on your tax return if it would withstand the scrutiny of an audit.

To avoid confusion, enlist the help of Five Star Accounting for help in preparing business taxes so you can maximize allowable deductions while avoiding the stress of improperly submitted expenses.