How Much a Small Business Make Before Paying Taxes in Canada

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Whether you choose to buy an existing business or start a new business, you can scale your business in the long term, be your own boss, and have the ability to create a valuable source of income. 


However, the same story with employment income is the same for your business income; you can’t escape taxes. Moreover, maybe you just started or brought a new business in Canada and are unsure how the tax laws work.


Well, don’t go anywhere because, in this article, we will find out the amount of income you need to earn before you start to pay taxes in Canada. 


Let’s dive right in! 

What is considered a small business? 

You fall in this category if you are: 


  • A sole proprietorship (own a business on your own)

  • Partnership (own a business with another individual) 

  • Self-employed 


Incorporated people don’t fall into this category and have different tax laws. Business income regarding small businesses includes earning money from: 


  • Trade 

  • Profession

  • Manufacture 


When calculating income for tax purposes, you must include all of your income, or you will face a 10% penalty for misinforming the Canadian tax authorities. 

The amount of income your small business needs to earn before you pay taxes in Canada

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What amount do you need to pay if you run a small business? 

If you own a small business, you’ll be paying taxes depending on the profit you generate from your small business. In Canada, you’ll have to pay territorial and federal taxes. 


Depending on the type of business you are operating in, you might also be required to collect Good and service taxes (GST) or Harmonized Sales Tax (HST) from your customers and add it to your income tax. 


Moreover, you don’t have to register for GST and HST taxes if your revenue hasn’t exceeded CAD 30,000 in the past year. However, if you are the one who makes taxable sales, leases, or even are a supplier in Canada, you can register for the GST/HST on your own even if you don’t fulfill the minimum requirements. 


Owning a small business, you have to take into consideration that you’re going to need to pay taxes quarterly (every three months) after your initial year. 

The tax amount 

The amount of tax you’ll have to pay will vary on your income level and the type of organization you are operating under. For example, a corporation will pay taxes based on its profits. Comparatively, a sole-proprietor will pay taxes based on the amount of taxable income they generate. 


Sometimes it may be challenging to save money for paying taxes because you never know the amount you will have to pay. In short, it’s always important to separate a considerable percentage of your income for paying taxes so that you don’t get any financial shocks along the way. 

Use a tax calculator


Furthermore, if you want to calculate your local tax rate, you can do so with a Quebec income tax calculator. The 2021 Income Tax Calculator Quebec gives you enhanced visibility to your marginal & average tax rate, tax refunds, and how much taxes you owed in 2021. 

Do you need to collect taxes from customers? 

While Canadians pay the GST/HST tax on most of their goods and services, you’ll need to most likely add this tax on everything you sell as well, unless the goods you are selling falls into a zero-tax category (groceries, child care, and more). 


Moreover, suppose you are more concerned about learning more about the GST/HST. In that case, you can directly visit the Canada Revenue Agency (CRA) website, which will clarify rates and many other things you may have unclear. 

Fair market value (FMV) of your assets 

You are allowed to transfer your personal assets to your small business. For example, if you own a sole proprietorship, the process is quite simple. The Canadian Income Tax Act requires you to transfer these assets, which are classified as a fair market value (FMV). If assets are sold higher than the fair market value, you must report the difference as a capital gain on your income tax sheet and benefit return. 


During the transfer time, your business will show the purchase of these assets with a cost equal to the FMV. Moreover, this value will be added to your Capital Cost Allowance (CCA) for income tax purposes. 

Will your business structure affect your tax returns? 

Your business structure determines the amount of taxes you have to pay. Small businesses will always start as either a sole proprietorship or partnership. Since these types of businesses aren’t incorporated, you have to report your personal income tax return and business income. 


Alternatively, in case your business is incorporated, you will need to report your corporate tax return (T2). Moreover, you can have a slight tax advantage while incorporating your business. The fundamental federal rate is 38% and 28% after a federal tax reduction. However, small businesses can apply for a small business deduction (SBD), which will lower the federal tax rate to only 9%. 


Provinces and territories will usually have a higher income tax rate for corporations. However, the lower one only applies to small businesses with an eligible income for a small business deduction. Moreover, Canadian tax authorities revise the tax rates each year, so we don’t know what may change with tax rates in the upcoming years. 

Do tax rates differ when you buy a business? 

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When you decide that you want to be a business owner, you have the option of starting a business or buying one. The choice you choose to go with will significantly affect your income tax purposes. 


You will pay the set amount for the entire business whenever you buy one. In a few cases, the price will be associated with each price of the assets, the inventory value, and a reasonable amount attributed to goodwill. 


If the individual asset prices are on the sale agreement and have a reasonable price, you can use these prices to claim capital cost allowance (CCA). If the individual asset prices aren’t set out in the contract, you must decide the purchase price of each asset, how much for inventory, and goodwill, if there’s any. Each amount that is attributed to assets should be its fair market value. The amount contributed to goodwill should be the balance left over from the purchase price minus total net identifiable assets. Let’s take a solid example from this. Let’s suppose you buy a business for $500,000. The fair market value will be identified as the following:


  • Accounts receivable: $90,000

  • Inventory: $50,000

  • Land: $120,000

  • Building: $200,000

  • Total net identifiable assets: $460,000


The purchase price is $500,000, and if we minus the total net identifiable assets, $460,000, the leftover balance will be $40,000. This is the amount that will be assigned to goodwill. 


Furthermore, you should know that goodwill is no longer considered part of eligible capital expenditures. Instead, according to the new Class 14.1, they are now classified as depreciable property. 

Self-employed income tax return 

If your business isn’t incorporated and you’re filing small business taxes as your self-employed personal income tax, you’ll be obliged to fill out a T2125 tax form to report that you are self-employed. 


The T2125 tax form is separated into a set of key sections and covers many key aspects concerning your business, which are: 


  • Business income: Commissions, fees, gross sales, discounts, returns, and more. 

  • Business partner details: Includes the details of any partners you may have when doing business, such as the partnership percentage, profit share, and loss. 

  • General business information: Business name, your name, address, partnership number, share, and more. 

  • Net profit and expenses: You’ll need to subtract expenses from your net profit for tax purposes. 

Wrapping it up

That’s all for this article on paying taxes in Canada when you own a small business. Maybe you have started a new business or plan to start one, or even buy an existing business. It’s always important to know about the tax laws and ensure you pay your taxes. After all, you don't want to pay any fines or face other devastating penalties. 


As we mentioned before, tax laws will differ for the form of organization you are running, especially if your business is incorporated. Your job is to read carefully how much taxes you have to pay and even consult with tax authorities if you need further information about federal taxes.


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