Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Knowing what income and expenses to include when calculating your income tax is essential if you have a small business in Canada. Keeping everything accurate to the cent will ensure you’re paying the correct and least possible tax.
Besides, the Canada Revenue Agency (CRA) checks all the details; you’ll want the filing to be as smooth as possible by declaring everything.
This article provides an overview of the income and expense types you need to declare when filing for income tax. So let’s get into the details of Canada’s tax rate on your income.
Types of Business Income
The first step in computing your taxable income is determining your business type.
Are you operating as a sole proprietorship, partnership, LLC, or S corporation? Check out the different CRA forms to know which one you should file.
No matter your business type, you must know your total income. Subtract your expenses from it, and you get your net earnings.
Check out the different income sources below.
Income from sales
The primary income source of your company will be sales. If you are in retail, merchandising, or wholesaling, sales are the income from the products you sell in your physical store or online. Meanwhile, if you offer services, your clients’ fees will serve as your sales income.
Foreign investment income
Investing in foreign companies using your profit is another income source. You should include the money you make from this in your tax declaration; use CRA Form 12100 for foreign interest and dividends when filing.
Interest from bank accounts
Leaving your money in the bank earns interest. The interest increases depending on the money you have in the bank.
You should also include this in your tax forms to determine Canada’s income tax on the interest rate. Use Form 12100 for this income report.
If your business is a partnership, an LLC, or an S corporation, you’ll get a share of your company’s income. The business type will be the basis of your taxable income.
The CRA requires each partner or shareholder to file separate income tax forms and pay income taxes individually.
Once you get your profit share, you will likely be looking for several profit spending ideas. You can invest in equipment to optimize your operations, expand your office or product lines, or invest in stocks. These are capital gains.
Whatever your choice is, your capital gain is taxable. Use Form 12700 for filing capital gains tax.
If you sell products with ownership or intellectual property rights like art, technology, music, or franchise, you will receive royalty fees every time someone uses your product. This money should be a part of your tax declaration using Form 10400.
Meanwhile, if you have spare space in your office, you can generate income from it by having it leased. Just ensure to declare your income using Forms 12599 and 12600.
The Different Business Expenses
Your taxable income is your net income, which you can derive using this formula:
Amount of all income − expenses = net income
This part will discuss the different business expenses you need to deduct to get your net income. Let’s begin!
You’ll find plenty of expense types, but what’s constant is that an expense is money that goes out of your account. You spend money for your company on recurring costs, seasonal spendings, or emergency expenses.
Here are some of the expense types you can use for categorization.
- Direct costs: These are costs to create or acquire your products, such as materials, labor, wages, or fuel.
- Indirect costs: Indirect costs are expenses that are not directly used for your product but affect its success. Examples are rent, electricity, and other operational costs.
- Fixed costs: Fixed costs do not change regardless of any situation or supply.
- Variable costs: Variable costs are sensitive to change. If some materials or supplies change, so will the variable costs.
- Operating costs: If you are in the service industry, these are the costs you pay to run your business every day.
The expenses vary depending on the line of business you operate. A direct cost for one company may be a variable cost for another. Therefore, in managing your company expenses, learn from other companies but tailor your decision-making to your operations.
Expenses you need to prepare for
Now, let’s dive into the specifics.
Tracking your expenses means you have historical data of how much you spend. And as a fledgling business, you need to anticipate your expenses.
Here are some of the common costs you will incur.
- Office equipment and supplies like computer, tables, chairs, appliances, and paper
- Utility fees
- Fees for business registration, permits, and licenses
- Product manufacturing costs
- Costs of advertising and marketing
- Employee wages and benefits
- Different insurance types
- Income tax and sales tax deduction
- Employee training and development
- Professional consultation fees
For your business to be more profitable, the key is to increase the income and minimize the expenses.
Check which expenses you can still cut down. For instance, you can hire remote staff to lower the cost of rent and supplies. Increasing the price of your products or services is the last resort; you want to maintain stable pricing to retain and attract more customers.
Canada Income Tax Rate Assistance from Unloop
Canada’s income tax rates vary depending on the type of business. You have to know what types of income you make for accurate taxation. You also need to consider the different expenses you incur during your business operations.
It's essential to keep records so that all information is available for tax purposes at any time! If you need assistance, we at Unloop can be your partner through our income tax services. We have a team of trained professionals who will track your business income and expenses and prepare the documents you will need in filing your income tax.
We’d love to discuss all our offers with you, so feel free to call us at 877-421-7270. Talk to you soon!