As a small business owner, it is important to keep on top of all relevant tax information to ensure you are prepared for a successful tax season. In order to maximize tax savings, you will need to be
1. There are different rules depending on your residency status
Your residency status will affect which income taxes you are subject to pay. To determine residency status, all the relevant facts must be considered, including residential ties with Canada and the length of time, purpose, intent, and continuity of the stay while living inside and outside Canada.
A person who is considered a resident of Canada must pay Canadian income tax on their worldwide income, so the income generated inside, and outside Canadian borders will all be subject to Canadian income tax.
Factors that will determine if you are a resident of Canada include:
- If you maintain a residence in Canada
- The amount of time spent in Canada
- If you have family ties in Canada (Spouse/Common Law or Dependent)
- Where your drivers license was issued
- Where you work
- Where you pay childcare expenses
- How many relatives you have in Canada
- If you have bank accounts in Canada
- Other social and economic ties
Non-residents are only obligated to pay taxes on their Canadian sourced income. A person is considered a non-resident if they:
- Normally, customarily, or routinely live in another country and are not considered a resident of Canada
- Do not have significant residential ties in Canada and any of the following applies:
o you live outside Canada throughout the tax year
o you stay in Canada for less than 183 days in the tax year *
*Not otherwise deemed to be a resident of Canada by the Income Tax Act (Canada)
A person who is not a resident of Canada for any part of the year, but who visits Canada for a total of 183 days or more in a year, may be deemed to be a resident of Canada, and is still liable for Canadian income tax on their worldwide income for the entire year.
2. Brush Up on Federal Basic Personal Amount
The Federal basic personal amount (BPA) has been increased by $579 from $13,229 to $13,808 in 2021. This means you can earn up to $13,808 without paying federal tax on your income.
The BPA is a non-refundable tax credit that can be claimed by all individuals.
The purpose of the BPA is to provide a full reduction from federal income tax to all individuals with taxable income below the BPA. It also provides a partial reduction to taxpayers with taxable income above the BPA.
A non-refundable tax credit reduces what you may owe. However, if your total non-refundable tax credits are more than what you owe, you will not get a refund for the difference.
Furthermore, the Canadian government has proposed that the tax-free threshold will continue to increase until at least 2023.
Here’s the Proposed Increase in BPA breakdown:
|Year||Proposed Increase in BPA|
In 2021 the maximum BPA has increased from $13,229 to $13,808 for individuals with a net income of below $151,978 or 29% tax bracket.
However, the BPA starts to decrease for individuals with net income between 29% and 33% ($216,511 for 2021). If your net income is above $216,511, your BBA will be $12,421. Your TD1 forms will be used to calculate the correct amount of tax that should be deducted from their employment income and will determine if they are eligible for tax credits.
3. Keep the TD1 Form In Mind If You Changed Jobs This Year
When your employment situation changes (such as changing jobs) you must fill out a new TD1 form. If there has been a significant change to your income while you are at the same job, you need to update the information on your existing form.
An employee does not need to fill out a new TD1 form every year unless there was a change to their tax credit amount. If an employee has to change their tax credit amounts, they must complete and give their employer a new form within seven days of said change.
Additionally, people who need to fill out a TD1 form include are those who are:
- Interested in increasing how much tax is being deducted at the source
- Beginning to receive pension payouts
- Looking to claim a deduction for living in a prescribed zone
4. Understand the Latest on Home Office Deductions and COVID-Related Filing Protocol
If you run your business from your home you can deduct expenses related to the physical workspace inside the home, as long as you meet one of the following conditions:
- The home is your principal place of business, or
- You use the space exclusively to earn business income, and use it on a regular and continuous basis to meet clients, customers, or patients
As a business owner you can deduct part of your maintenance costs such as heating, home insurance, electricity, and cleaning materials. You can also deduct part of their property taxes, mortgage interest, and capital cost allowance (CCA). To calculate the part you can deduct, use a reasonable basis, such as the area of the workspace divided by the total area of the home.
Where a work space that is an individual’s principal place of business is also used for personal purposes, expense should be apportioned between business and personal use. A reasonable basis of apportionment may be based on the number of hours a day a room is used for business purposes. If the business is run for only part of the week or year, reduce your claim accordingly.
For more information, go to Income Tax Folio S4-F2-C2, Business Use of Home Expenses.
Employees have different options when it comes to tax deductions on their home workspace. In response to the COVID-19 pandemic the federal government implemented two methods to assist employees with their work from home expenses, these include the detailed method and the temporary flat rate method.
5. Remain Up to Date on Tax Legislation
In 2021, a multitude of amendments were made to the Tax Act and its regulations to extend and vary existing federal relief measures such as the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”), and to introduce new measures such as the Canada Recovery Hiring Program (“CRHP”), the Tourism and Hospitality Recovery Program, the Hardest-Hit Business Recovery Program and the Local Lockdown Program. At the time of writing, these newer measures are legislated to be available until May 7, 2022.
The 2021 Fiscal Update provides the Government’s assessment of the fiscal health of the country by outlining the economic measures previously adopted and proposed by the Government to address the immediate needs of individuals and businesses relating to COVID-19 pandemic and to support Canada’s economic recovery. This has reaffirmed the Government’s intention to implement certain tax measures announced in Budget 2021, including the DST and tax incentives to promote clean energy investment.
The 2021 Fiscal Update did not announce any changes to the corporate or personal federal income tax rates, but did announce the following new tax measures:
- A 25% refundable tax credit for small businesses that incur qualifying expenditures relating to air quality improvements at qualifying locations between September 1, 2021 and December 31, 2022; and
- A refundable tax credit to return fuel charge proceeds paid by eligible farming businesses under the federal carbon tax, starting in the 2021-2022 fuel charge year.
If you have any questions about new tax legislation you can always discuss them with your accountant.
6. Collect All Necessary Business Documents for Your Accountant
Here are the business records you will need to give to your accountant:
- Deposit slips
- Bank statements
- Business credit card statements
- Income records:
o Sales invoices
o Bank deposit slips
- Fee statements
- Loan Agreements and year-end balances statements
- Detailed year-end inventory listing
- Receipts on capital purchases or sales in 2021
- If you have employees and/or subcontractors:
o T4SUM: Summary of Remuneration Paid
o Worker’s compensation payments or benefits
o Payroll, source deductions and taxable benefits for employees
- If you make payments to subcontractors (construction only)
o T5018: Statement of Contract Payments
7. Know Your Estimated Tax Payments
Estimated tax is a quarterly payment of taxes for the year based on your reported income for the period. It is the amount you’re responsible for paying on earnings that aren’t subject to withholding. This includes income from dividends, awards, rent, self-employment and alimony. Anyone who’s receiving money from a pension or salary that’s subject to withholding may also owe estimated tax if they haven’t paid enough income taxes.
Most of those required to pay taxes quarterly are small business owners, freelancers, and independent contractors. They do not have taxes automatically withheld from their pay cheques as regular employees do.
Estimated taxes may be made for any type of taxable income that is not subject to withholding. This includes earned income, dividend income, rental income, interest income, and capital gains.
It’s important to pay quarterly estimated tax payments because if you don’t pay or under pay you will owe penalties and interest on late payments or underpayment on taxes.
The tax process requires meticulous attention to detail, to be prepared and organized, use QuickBooks Online to keep all your financial records, expenses and sales tax reports in one place. Plus, Scotiabank clients receive a special discount on their monthly subscription (1). Sign-up today!
This article was first published on QuickBooks’ Canada Blog. The original article can be found HERE.
1. The above discount is only available to new QuickBooks customers, for the first 6 months of the subscription and cannot be combined with any other QuickBooks Online offers. The monthly subscription price excludes HST/GST. Offer is valid for a limited time for new QuickBooks Online customers only.
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