Whether you became a new business owner in 2021, received government support to help your business through the pandemic, or shifted your employees back to the office (and possibly back home again), your tax return will need to reflect the changes that affected your business. Josee Cabral, Senior Tax Specialist at H&R Block explains what Canadian business owners can expect this tax season.
If you started a new business in 2021
Research shows that nearly two million Canadians started a business during the pandemic. Whether driven by unemployment or opportunity, many Canadians struck out on their own last year. If you became a first-time business owner, here’s what you need to know for your 2021 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 Cabral. “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 Cabral. You simply have to identify the percentage of your home that you used for business purposes.
You need to file even if your business earned no income
Even if your business earned no revenue in 2021, you could still file $0 income from your business and claim reasonable expenses against the loss. “If your business is in the minus, the expenses you can claim against it are going to lower your income – and your associated taxes,” explains Cabral. She cautions, however, that the government generally accepts a maximum of two years of negative revenue, after which point, a business is expected to make money.
If you incorporated a business in 2021
If you incorporated your business last year, you will now need to file two tax returns, explains Cabral. “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 continued to be made available in 2021 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 2021 return.
If you received the Canada Emergency Wage Subsidy (CEWS),Canada Emergency Rent Subsidy (CERS), the Canada Recovery Hiring Program (CRHP) 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 Cabral. “The money received is considered income, and 100% of that is subject to income tax.”
Keep in mind, as of October 24, 2021, CERS and CEWS were replaced with two new programs, each offering rent and wage support: The Tourism and Hospitality Recovery Program (THRP) and the Hardest Hit Business Recovery Program (HHBRP). Support received from these programs is also taxable.
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 $60,000 CEBA loan last year, up to $20,000 is forgivable as long as you repay the rest of the outstanding balance by December 31, 2023,” says Cabral by way of example. “That $20,000 has to be reported as 2021 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 $20,000) 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 Cabral.
When COVID-19 benefits were first made available, there was no income being withheld at the source, and many Canadians found themselves with large amounts owing to the Canada Revenue Agency or Revenu Quebec come tax time. The good news is, any repayments made in 2021 can be used to correct your 2020 tax return, if necessary. “If in 2021 you paid back $6,000 of a loan received in 2020, we can file an adjustment to your 2020 taxes and take away that $6,000,” explains Cabral. “You can also apply it against your 2022 taxes if you prefer,” she adds.
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 any wage support from the subsidies mentioned above, you have to continue to deduct and remit these premiums for employees who are on paid leave and for whom the subsidy is being collected. However, 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, Cabral 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.
- Keep your receipts. Should the government ever ask for proof of your expenses, you are obligated to provide documentation – otherwise, your deductions can be cut back in the future. “Your receipt has to include the date of the transaction, the supplier/merchant name, the total transaction cost with taxes and an itemized list of what was purchased,” explains Cabral. “Your credit card statement or transaction receipt won’t suffice.”
- 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 Cabral. “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 2021, 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 Cabral. If you don’t file, you don’t have that same avenue for assistance.
2021 was another year of change and uncertainty – 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.