Starting your own business? Consider this
Many Canadians dream about being their own boss. But with most businesses failing in the first year, you need to make sure you have a plan and understand your obligations to the Canada Revenue Agency.
According to recent Statistics Canada numbers, there are more than 2.6 million self-employed Canadians. If you are one of the thousands of Canadians who choose to start their own business in 2012, there are a number of factors to consider.
- Business plan: It is great to take a hobby or passion and try to turn it into a business, but you need to have a plan for how you will earn money. If you need to raise money, your investors or bank will also want to see your plan and projections. And the Canada Revenue Agency (CRA) may be interested as well. Though the CRA does not expect you to earn a profit in the early years, you need to have some expectation of profit or they may decide your venture is actually a hobby, rather than a business. Losing money every year will most likely attract the attention of the CRA auditors.
- Business and day jobs: If you are keeping your day job and starting your business on the side, you can deduct business losses against employment income. If your losses from the business exceed your income from other sources, you have a non-capital loss which you can carry back three years or forward 20 years and deduct against income in those years.
- Registering your business: If you think your gross revenues will be more than $30,000, you need to charge HST on your invoices and remit payments to the CRA on a quarterly or annual basis. In order to submit HST payments, you need to have a business registration number with the CRA. If you don’t think you will hit the $30,000 mark in your first year, you can always wait to register with the CRA until you have more revenue generated. And if you are far more successful in your first year than anticipated but didn’t register for HST, it is possible to register afterwards and catch up on HST filings.
- Hiring employees: You must also open a payroll account with the CRA and remit taxes, EI premiums and CPP contributions on a monthly basis if you hire employees.
- Insurance: You should also investigate your insurance needs. If you have purchased expensive equipment as part of your business, it will most likely need its own policy. And if you are providing consulting services, you may want to look at professional liability insurance. Your insurance premiums would be considered a business expense. Depending on the type of equipment purchased, you can depreciate a percentage of the asset over a specific timeframe, based on CRA guidelines.
- Record keeping: Make sure you keep receipts and maintain a log book of business kilometres, if you use your car. Trying to re-construct your receipts at the end of the year is not recommended. Even if you are the worst record keeper ever, keep all your paperwork in one place so at least it can be sorted at tax time. But without receipts, you cannot claim business expenses. Remember, your expenses help reduce your tax payable, so every piece of paper helps.
None of this should discourage you from venturing out on your own. If you have a good business plan and the energy to make it work, starting a business can be very rewarding. But it is always best to understand all the conditions before you jump in.
Master tax pro and franchise owner