Small Businesses and Self-Employed Income
The information on this page is for:
- self-employed individuals
- sole proprietorships
- commission based incomes
This information does not apply to you if you're incorporated.
Business income includes money you earn from a:
- manufacture or
- an undertaking of any kind
i.e. Income made from employment, such as wages and salaries, is exempt from business income.
Things to keep track of while operating your business
The thing everybody wants to know when starting a business is how to pay less tax. You can start by having knowledge of which items are deductible and which are not. Although there are many variables I will go through a list of the most common
Cost of Sales;
Purchase of materials
Salaries and wages
Interest on loans
- Office expenses
Delivery and freight
Operating expenses are expenses required to run
your business. Some operating expenses may only
partial business use and partial personal
(i.e. cell phone)
Bringing assets into a business
Determine the fair market value of transferred assets and the implications of acquiring an existing business.
Fair market value for your assets
You might transfer your personal assets to your business.
If you are operating a sole proprietorship, this is a reasonably simple process. The Income Tax Act requires that you transfer these assets to the business at their fair market value (FMV). This means that we consider you to have sold the assets at a price equal to their FMV at that time. If this amount is greater than your original purchase price, you must report the difference as a capital gain on your income tax and benefit return.
Your business will show a purchase of these assets, with a cost equal to the FMV at the time of the transfer. This is the value that you will add to the capital cost allowance (CCA) schedule for income tax purposes.
For income tax purposes, when you transfer the property to a Canadian partnership or a Canadian corporation, you can transfer the property for an elected amount. This amount may be different from the FMV, as long as you meet certain conditions. The elected amount then becomes your proceeds for the property transferred, as well as the cost of the property to the corporation or partnership.
The rules regarding these transfers of property are technical. They allow you to change your business type from a sole proprietorship to a corporation or a partnership, or from a partnership to a corporation, on a tax-free basis.
For more information, go to Interpretation Bulletin IT-291, Transfer of Property to a Corporation Under Subsection 85(1), Information Circular IC76-19R3, Transfer of Property to a Corporation Under Section 85, and Interpretation Bulletin IT-413R, Election by Members of a Partnership Under Subsection 97(2).
For GST/HST purposes, you may be able to claim an (ITC) for the GST/HST paid or payable on the property such as capital property and inventory, that you have on hand on the day you register. For more information, go to Input tax credits and Guide RC4022, General Information for GST/HST Registrants.
Buying a business
When you are considering becoming a business owner, you have the option of buying an existing business or starting a new one. The option you choose will affect how you will account for the purchase of the business assets for income tax purposes.
When you buy a business, you generally pay a set amount for the entire business. In some cases, the sale agreement sets out a price for each asset, a value for the inventory of the business and, if applicable, an amount that can reasonably be attributed to goodwill.
If the individual asset prices are set out in the sale agreement, and the prices are reasonable, then you could use these prices to calculate your claim for capital cost allowance (CCA).
If the individual asset prices are not set out in the contract, you have to decide how much of the purchase price you should reasonably attribute to each asset, how much to inventory, and how much, if any, to goodwill. These amounts should coincide with the amounts the vendor determined when reporting the sale.
The amount you attribute to each asset should be its FMV. You should attribute to goodwill the balance of the purchase price that remains after you attribute the FMV to each asset and to inventory.
Once you have determined the values for the assets and the goodwill, sort the assets into the appropriate classes for the purpose of claiming the capital cost allowance (CCA). On January 1, 2017, the eligible capital property system was replaced with new capital cost allowance (CCA) class 14.1 with transitional rules.
Goodwill and certain other intangible properties are no longer considered to be eligible capital expenditures. Instead, these properties are now treated as depreciable property in new Class 14.1. For more information see Chapter 5 "Eligible capital expenditures" in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Treat the value of the inventory as a purchase of goods for resale, and include it in the calculation of the cost of goods sold in your income statement at the end of the year.
GST/HST when you buy a business
For GST/HST purposes, if you buy a business or part of a business and acquire all or substantially all (at least 90%) of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST/HST payable on the sale by filling in form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You cannot use this election if the seller is a registrant and you are not a registrant. In addition, you must buy all or substantially all of the property, not only individual assets.
For the election to apply to the sale, you have to be able to continue to operate the business with the property acquired under the sale agreement. You have to file Form GST44 on or before the day you have to file the GST/HST return for the first reporting period in which you would have otherwise had to pay GST/HST on the purchase.
Even when you use the election, GST/HST will still apply to a taxable supply of a service made by the seller; a taxable supply of property made by way of lease, licence, or similar arrangement; and, if the buyer is not a GST/HST registrant, a taxable sale of real property.
Shares of a corporation
Another way of acquiring an existing business is to buy the shares of a corporation. This does not affect the cost base of the assets of the business. As explained previously, a corporation is a separate legal entity and can own property in its own name. A change in the ownership of the shares will not affect the tax values of the assets the corporation owns. Generally, the purchase of shares of a corporation is not subject to GST/HST.
For more information on changes to your business, go to Changes to your business.
Forms and publications
Other related links
You buy a business for $480,000. The FMV of the net identifiable assets of the business is as follows:
Total Net Identifiable Assets
You can determine the value of the goodwill by subtracting the total value of teh net identifiable assets from the purchase price:
Net Identifiable Assets
Amount Assigned to Goodwill
Maintenance and repairs
Convention and training
Home Office Expense;
Maintenance and repairs
Be aware that your taxable income is only deducted by the percentage of the space your home office occupies out of your total home.
License and registration
Maintenance and repairs
Claiming vehicle expenses require a little more attention as you need to separate the distances traveled for work and for personal use. CRA demands a log book recording the kilometers used specifically for business.