What Every Sole Proprietor Needs to Know About Their Taxes

Hello everyone. Today I want to talk to you about the tax obligations for sole proprietorships. My name is Ronica Cannon, I'm a cpa, a CFA and the founder of Montreal Financial, where you can find lots of resources for small businesses, solopreneurs, self employed people and the like. So if you are, if you have started a business and you have decided to become a sole proprietorship, which is essentially an unincorporated business, and in Canada there's really only two kinds of businesses. You can be unincorporated, you can be a sole proprietorship or a partnership, or you can incorporate your business. The majority of small businesses are start out as sole proprietors and then perhaps further down the road they incorporate or they just continue to operate as sole proprietorships. As a sole proprietorship, you essentially have two types of tax obligations. And there is some confusion around this. People often hear $30,000 and they think that is is the limit for taxes.

They're not clear on what that refers to. So in this video I am going to clarify that concept and hopefully remove the confusion. So again, there are two types of tax obligations. And the first one that applies to all sole proprietors, which is essentially anyone earning an income, you could have a side hustle. You could be self employed, a freelancer, as long as you're unincorporated and you are bringing revenues. Or if you've started a business, you have an income tax obligation, which means you have to report any income that you earned on your personal tax return on a schedule referred to as the T2125. In addition, if you do have a small business or you're self employed or any other one of those business types that I mentioned, you are also able to deduct expenses. And common expenses can be if you're selling a product, they could be the cost of the product, and then you have rent and office supplies, dues and subscriptions. You might have a Canva subscription or Google Drive or Dropbox or some specialist subscriptions for your business. You can also deduct home office expenses. If you use your vehicle for business, you're also allowed to deduct a portion of that. And telephone and Internet are some of the common types of expenses and will be the subject of a future video. So that is a requirement. And again, as soon as you start earning income, for example, if you have a website and you have advertising on it, or you earn advertising revenue from YouTube, you would have to declare that income on Schedule T2125 of your personal tax return. So the tax return that you're used to file that you have to file every year. There is just an additional schedule for sole proprietorships or unincorporated businesses. Now, the second type of tax obligation, and this is where the $30,000 comes into play, is the GST, HST and QST. If you're in Quebec requirement. And the GST and HST is essentially a sales tax. It is charged on top of your products or services. If you have ever bought anything in Canada, you have paid G in HST and QST in Quebec. So you will understand it at least from a consumer side. Once you become a business, at a certain point you are required to register. And for most businesses, with a couple of exceptions are required to register once they have made $30,000 in sales in the last four quarters. And so you have to calculate this every quarter and to make sure that you haven't exceeded the $30,000. Once you do, then you are required to register for GSTHST and then you add it to the amount that you charge your customer or client, either in the invoice or you know, if you're using cash register, it would be added on top. Now keep in mind this is, it's an addition. You collect it, you collect it on the, on behalf of the government, you are an agent of the government. And then at the end of the year or at the end of the quarter, depending on what filing period you choose, you have to take this money that you have collected and send it or remit it back to Revenue Canada. And in Quebec it is Revenue Quebec because it is always different in Quebec. So and it's very important to keep this in mind, but it has no real impact on your earnings, therefore it is not an out of pocket amount. It is important to keep in mind that if you are collecting GST and hst, this is not your your money to begin with. So ideally you should use it as cash flow. In the business, if you have an annual filing period, you should simply collect it, ideally create a separate bank account, a separate savings account and deposit it there. And that way you won't have to dip into your own cash flow at the end of the year. Or there might be issues with coming up with the amounts that you might owe. And a separate bank account is also useful for your income taxes which you should calculate and make sure that you have enough funds. A good rule of thumb is between 30 and 40%, but it could be higher. I encourage you to use a tax calculator which you can find online and determine what your estimated taxes are. So to summarize you essentially have two types of taxes as a sole proprietor. One that every single sole proprietor has to complete is your income taxes and your income is reflected on the schedule on your personal tax return. And the second type of tax is for businesses that are registered for GST, HST, and QST, and the registration limit is $30,000. Now keep in mind, you don't have to wait to register. Once you've earned $30,000, you can register on day one even if you haven't earned any income at all. And this can be beneficial, especially since you are allowed to claim back taxes that you pay on business related expenses. This will also be the subject of another video as I go through a series of videos a at Sole Proprietorships, so I hope you found this useful. Please let me know if you have any questions in the comments and please like and subscribe. I'll see you next time.