So you want to open a small business or sole proprietorship in your spare time. Let’s face it, a lot of Canadians are doing it. With the rise in mortgage rates and the cost of everything else, we are all trying to make ends meet. Food prices alone are expected to rise 5 to 7 percent by the end of 2023.

So what do you need to do when that side gig gets larger and becomes a business?

Some steps below will set you up for success on your road to being an entrepreneur.

Sole Proprietor Business Registration:

Completing the necessary business registration steps is crucial to set up smooth operations for your sole proprietorship in Canada. 

Register with the relevant provincial or territorial authorities, adhering to their specific requirements and providing essential information about your business. 

Register your sole proprietor name in your provincial jurisdiction so nobody can use it. Once you have registered your business name, follow this link to register with CRA and receive a business number. Business Registration Online – What you can do – Canada.ca

Obtaining a Business Number (BN) from the Canada Revenue Agency (CRA) is vital, as it is a unique identifier for tax-related matters. 

Once you have your business number, register for a payroll account, such as the Payroll Deductions Account, if you plan to hire employees. 

Additionally, assess whether your business meets the mandatory or voluntary registration criteria for Goods and Services Tax (GST) or Harmonized Sales Tax (HST). GST registration is mandatory if you exceed $30,000 in one calendar quarter. Or you exceed the $30,000 threshold over the previous four (or fewer) consecutive calendar quarters (but not in a single calendar quarter). Before the $30,000, GST registration is voluntary.

Lastly, consider trademark registration through the Canadian Intellectual Property Office (CIPO) to safeguard your brand. Remember to research any additional local, provincial, or industry-specific requirements applicable to your business, as compliance with regulations is essential for a successful sole proprietorship.

With your business setup complete, there are some items below that you are required to maintain throughout your tax year.

Income and Expenses:

• Keep accurate records of all business income and expenses. You can use bookkeeping software or a spreadsheet.
• Maintain separate business bank accounts and credit cards to track transactions.
• Organize and retain receipts, invoices, and other supporting documents. This can be filed digitally or it can be paperwork that is filed somewhere like a filing box. Keep income and receipts for six years.

Income Tax Filing:

• File an annual T1 Personal Income Tax Return (T1) as a self-employed individual. Your business year will be January to December each year that you file.
• Report business income and expenses on Form T2125, Statement of Business or Professional Activities, which is included with the T1 return. 
• Consider using tax software or professional assistance to prepare your tax return.

Goods and Services Tax/Harmonized Sales Tax (GST/HST):

• Determine if your business needs to register for GST/HST. See the requirements to register for GST above.
• Collect GST/HST on your sales invoices and track GST on your taxable supplies if applicable. The GST on sales minus the GST on taxable supplies will give you the amount you must remit to CRA.
• Set up your GST/HST filing frequency quarterly or annually, and remit the collected taxes before the due dates. Payment can be set up through your business’s online banking.

Payroll Taxes:

• If you have employees, deduct and remit Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax withholdings from their wages.
• Remit these deductions to the CRA according to the required schedule. Usually, the 15th day of the following month.
• File and submit the necessary payroll-related forms, such as T4 slips for employees, by February of the next year.
• Set up ROEWeb to be able to provide employment paperwork when an employee leaves your employment. Access Record of Employment on the Web (ROE Web) – Canada.ca

Home Office Expenses:

• If you operate your business from a home office, you may be eligible to claim deductions for a portion of your home-related expenses (e.g., rent, utilities, maintenance).
• Maintain records to support your home office expenses, such as calculating the percentage of your home used for business purposes.

Capital Assets and Depreciation:

• Keep track of capital assets used in your business, such as equipment, vehicles, and furniture.
• Determine these assets’ eligible depreciation expenses and capital cost allowance (CCA) claims.
• Include the appropriate information on your tax return in the T2125 form.

Other Deductions and Credits:

• Familiarize yourself with other potential deductions and credits applicable to your business, such as eligible business-use-of-home expenses, motor vehicle expenses, and professional fees.
• Review the CRA’s website Canada Revenue Agency – Canada.ca, or consult a tax professional to ensure you claim all relevant deductions and credits.

Record Retention:

• Keep all business records, including tax returns and supporting documents, for at least six years in case of future audits or inquiries by the CRA.

Seek Professional Advice:

• Consider consulting with a tax professional or accountant specializing in small business taxation to ensure compliance and maximize tax savings.

Remember, this list provides a general overview and may not cover every specific requirement for your situation. It’s always advisable to consult with a tax professional for personalized advice based on your unique circumstances.
Remember that tax laws and regulations may change over time, so it’s always a good idea to consult with a tax professional or review the most up-to-date information from the Canada Revenue Agency (CRA).

Our KineticBooks & Tax Solutions team can answer your tax questions. With over 25 years of tax experience, you are in good hands.
If you have any questions or want to discuss your tax needs, please don’t hesitate to reach out.