Proprietors: File Now to Avoid CRA Interest Charges

Unincorporated business owners can avoid late filing penalties by filing their taxes before midnight June 15. However, if you owe money to CRA, you must pay by midnight May 2 to avoid interest charges.

If you just started a new venture in 2015—perhaps out of the basement of your home—here are some filing tips to help get you through tax season:
 

• You have a new relationship with CRA. CRA depends on your “self-assessment” of taxes owing so you have the burden of proof for reporting income and deductions accurately. Your obligations may also extend to having to make remittances of payroll source deductions, and GST/HST and quarterly tax instalments. Take the time to understand these obligations when you apply for your required Business Number, or talk to your Tax Services Specialist before the end of April. 
• Record retention is law. Because your legal obligation is to self-assess your income, the deductions that will reduce it and then to report net business income on your personal tax return, expect to open your books to CRA’s audit scrutiny. The best defense is to file an audit-proof return. Most businesses will be required to match income and expenses and so you’ll need to understand the difference between the cash and the accrual method of reporting your income.
• How is business income reported on the tax return? The tax form for reporting business income and expenses is Form T2125 Statement of Business or Professional Activities. Check it out in your tax software. You’ll note it is a form that contains adjusting entries for personal use of certain expenses, for example the use of a home office.
• Make your own CPP contributions. You’ll also be required to make your own remittances to the Canada Pension Plan (CPP) when you file your personal tax return, so save up. The maximum amount payable is 9.9% of insurable earnings of $53,600, less a $3,500 basic exemption. Therefore, the maximum payable on line 421 is $4,959.90 for the year and it is payable at the time you file your return. That’s a real surprise for many new entrepreneurs. Half of the amount payable qualifies as a deduction on Line 222 and the other half as a tax credit (non-refundable) on Line 308. The CPP payable is calculated on Schedule 8 of the return.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services and author of 52 books on family tax preparation and planning. 

NEXT TIME:  START-UPS: SEVEN TIPS TO AUDIT-PROOF YOUR TAX RETURN

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