Income Taxes for Sole Proprietorship Income

A sole proprietor pays taxes by reporting income (or loss) on a T1 income tax and benefit return. If you are a sole proprietor, you or your authorized representative have to file a T1 return if you:

• have to pay tax for the year
• disposed of a capital property or had a taxable capital gain in the year
• have to make Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments on self-employed earnings or pensionable earnings for the year
• want to access employment insurance (EI) special benefits for self-employed persons
• received a demand from us to file a return
• You also need to file a return if you are claiming an income tax refund, a refundable tax credit, a GST/HST credit, or the Canada Child Benefit. You should also file a return if you are entitled to receive provincial tax credits.

As a sole proprietor, you may have to pay your income tax by payments called instalments. You may also need to make instalment payments for CPP contributions on your own income.

Tax instalments are payments you make throughout the year to cover the taxes you normally pay in one lump sum on April 30 of the following year. You pay these instalments during the year while you are earning the income, similar to how an employer deducts tax directly from each pay period.

You may have to pay tax instalments for next year's taxes, if your net tax owing is more than $3,000 (for Quebec $1,800) for 2024 and in either 2023 or 2022.

Tax instalment payments are due by the following dates (except farmers and fishers who have one due date on December 31):

• March 15
• June 15
• September 15
• December 15

Income Taxes for Partnership Income

Generally, a partnership does not pay income tax on its income and does not file an income tax return. Instead, each partner files an income tax return to report their share of the partnership's net income or loss. This requirement for each partner to report their share of the partnership's net income is the same whether the share of income was received in cash or as a credit to one of the partnership's capital accounts.

Income Taxes for Corporation Income

All resident corporations (except tax-exempt Crown corporations, Hutterite colonies and registered charities) have to file a corporation income tax (T2) return every tax year even if there is no tax payable. This includes:

• non-profit organizations
• tax-exempt corporations
• inactive corporations

Most corporations can file their return electronically using the Internet. It is mandatory for certain corporations with annual gross revenues that exceed $1 million.

If you have incorporated your business or are considering incorporating to provide services to another company, please note that there are tax implications for a personal services business.

Understanding the nature of your business arrangements is essential when it comes to complying with your tax obligations. If you have incorporated your business to provide services to one other company you might be considered to be operating a personal services business (PSB) by the Canada Revenue Agency (CRA).

It is important that you are aware of the tax implications of incorporating and operating a personal services business. There may be legal and/or financial consequences for failure to report appropriately. If you are an incorporated employee and your corporation is operating a personal services business, your tax obligations are different than other corporations.

A personal services business is not eligible for the general tax rate reduction or the small business deduction, which allow other corporations to reduce their corporate tax rates. As a result, a personal services business is subject to the full federal and provincial corporate tax rates on all taxable income, plus an additional 5%.

A personal services business is limited in the expenses they may deduct. Expenses that may be deducted by a personal services business are outlined in the T2 Corporation- Income Tax Guide and are as follows:

• the salary and wages the corporation pays to its incorporated employee(s);
• any benefit or allowance the corporation provides to its incorporated employee(s);
• certain expenses of the corporation associated with selling property or negotiating contracts; and
• legal expenses incurred by the corporation in collecting amounts owing.

A corporation that is operating as a personal services business is required to file a T2 Corporation Income Tax Return and pay any amounts owing to the CRA by the corporate tax filing and payment deadlines, like any other corporation.

When completing the T2 return, however, it is important to remember that a personal services business is not eligible to claim the same tax deductions and expenses that are available to other corporations, and they are subject to a higher tax rate.

Federal rates: The basic rate of Part I tax is 38% of your taxable income, 28% after federal tax abatement. After the general tax reduction, the net tax rate is 15%. For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 9%.

Provincial or territorial rates: Generally, provinces and territories have two rates of income tax � a lower rate and a higher rate. The lower rate applies to the income eligible for the federal small business deduction. One component of the small business deduction is the business limit. Some provinces or territories choose to use the federal business limit. Others establish their own business limit. The higher rate applies to all other income.

In Ontario, the lower rate is: 3.2%, the higher rate is: 11.5%, and the business limit is: $500,000.

Applying for a Mortgage or a Loan

If you are planning to apply to a financial institution for a mortgage or a loan, make sure your documents are in order.

Usually, if you are employed, the lender requires the two most recent paystubs and the previous year T4 slip: Statement of Remuneration Paid, but some lenders will request two years T1 Income Tax Returns and two years Notice of Assessment (NOA) instead.

Please keep in mind that If your employer is your corporation, then the lender might also require the Financial Statements and/or T2 Corporation Income Tax Returns of your corporation for two years.

However, if you are self-employed, the lender will be looking for a two years T1 Income Tax Returns and two years Notice of Assessment (NOA).

Sometimes, the income shown on your paystubs, T4s, T1s, NOAs, Financial Statements and T2s might not be enough for you to be approved for a mortgage or a loan.

If you need help with that, please feel free to contact us, we will be able to help, so do not hesitate to write us a message under the Contact Us tab.