Whether you became a new business owner in 2020, received government support to help your business through the pandemic, or shifted your employees to a work-from-home environment, your tax return will look a little different this year. Lisa Gittens, Tax Professional at H&R Block explains what Canadian business owners can expect this tax season.
If you started a new business in 2020
According to Ownr, the company registered 16,000 new Canadian businesses on its platform between March 2020 and the end of January 2021. Whether driven by unemployment or opportunity, many Canadians struck out on their own last year. If you’re a first-time business owner, here’s what you need to know for your 2020 tax return:
You’ll need to report your self-employment income
Whether you became a full-time business owner or started a side-gig to boost your earnings last year, you have to report all income earned on this year’s return. “Any income earned from self-employment will be taxable, and you’ll need to report it as such on a Statement of Business and Professional Activities form (T 2125),” says Gittens. “You then need to add it to any other income you earned.”
For example, if you worked for another company for a few months and received a T4, you will add that income to any income earned as a business owner for your total taxable income.
You can claim self-employment expenses
From operating to capital costs, business investments to building or equipment expenses, you can claim expenses related to your business on your T 2125 form. “And if you worked from home, you can claim expenses such as rent, utilities, home insurance, etc.,” says Gittens. You simply have to identify the percentage of your home that you used for business purposes.
If you incorporated a business in 2020
If you incorporated your business last year, you will now need to file two tax returns, explains Gittens. “One to report your individual income – whether that’s from employment, rental income or investments – and a second for the incorporated business.” In addition, if you’re a partner in the business and were paid dividends from the incorporation, you will need to issue a T slip and report the dividends on your personal return.
If your business received government support
Billions of dollars were made available in 2020 by the federal government to support Canadian businesses negatively affected by COVID-19. For so many businesses, relief measures have enabled them to stay open and move forward through the pandemic.
If your business collected COVID relief in the form of a subsidy or forgivable loan, it’s important to note that the money received is considered taxable income and must be reported on your 2020 return.
If you received the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) or Canada Emergency Commercial Rent Assistance (CECRA), for instance, you will need to show this on your return. “These subsidies were there to replace the income that was lost by the business,” explains Gittens. “The money received is considered income, and 100% of that is subject to income tax.”
Taxable loan forgiveness
Meanwhile, if your business received the Canada Emergency Business Account (CEBA) loan, you’re likely aware that a percentage of the loan is forgivable, providing the rest of the loan is repaid by the deadline. It’s also important to be aware that the amount that is forgivable is taxable in the year you received the loan.
“If your business received a $40,000 CEBA loan last year, 25 percent – or $10,000 – is forgivable as long as you repay the rest of the outstanding balance by December 21, 2022,” says Gittens by way of example. “That $10,000 has to be reported as 2020 income on your return.”
And if you don’t repay the loan by the deadline or otherwise don’t qualify for loan forgiveness? If you end up repaying the loan in full, you can claim the amount that was previously forgivable (i.e., the $10,000) as a deduction in the year you fully repay the loan. “The Canada Revenue Agency (CRA) has indicated that offsets will be available until 2023,” advises Gittens.
Tax consideration if you have employees
If you have a payroll account with the CRA, you’re already submitting payroll reports, which indicate how much you are paying employees quarterly, how much income tax is deducted, as well as any Canada Pension Plan (CPP), Quebec Pension Plan (QPP), Quebec Parental Insurance Plan (QPIP) and Employment Insurance (EI) premiums that are deducted from wages.
If you receive the CEWS, you have to continue to deduct and remit these premiums for employees who are on paid leave and for whom the CEWS is being collected. However, as a CEWS recipient, you can claim a 100% refund for the employer-paid part of contributions made on behalf of eligible employees.
Be sure your collection of the CEWS is reflected when you file your payroll in order to receive your refund.
For more information about reporting requirements for employers, please visit the Government of Canada website.
More Important Tax Tips Business Owners Should Know
Since this tax season will come with a number of changes for many business owners, Gittens offers a few important tips:
- Make sure you capture all of your operating costs – including rent, utilities, equipment purchases and more. If you’re a new small business owner, understand what you can claim so you can offset the income you earned.
- Get your bookkeeping together while business is quiet. If you’re experiencing a slowdown due to COVID-19, use this time to organize your finances in time for the tax filing deadline.
- Claim bad debts. If you have invoiced clients and feel you have no hope for collecting payments, claim them as bad debts or write offs on your return.
- Get professional advice. “All questions are on the table this year,” says Gittens. “Make sure you’re getting professional advice before you file – whether it’s from a tax professional, an accountant or directly from the CRA. No question is a stupid question when it comes to taxes, especially during this time.”
- File your return. With so many businesses just beginning, struggling or changing in 2020, there is a major tax learning curve this year. As a result, owners may face surprises or shortfalls when it comes to the tax they owe. If this is your situation, the most important thing to do is file your return. “Once you file your return, you can contact the CRA. They will ask you what your financial situation is and set up a payment plan for you. It’s just important to file on time – once you do, you can get the help you need,” says Gittens. If you don’t file, you don’t have that same avenue for assistance.
A lot changed in 2020 – and as a business owner, your tax filing requirements may have changed with the times. Fortunately, there are many resources available to help make sure you file correctly and on time, and that you maximize the unique benefits available to you this tax season.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.