The self-employed in Canada need to know what the CRA considers to be business income. What you categorized as business income is necessary for when you calculate your taxable income. Let's go over what you need to know.
The federal government looks at any goods or money you earn from all activity without an employer paying you for it. Even if you have not registered your business or declared the income associated with the business, all earned income "small or large" is taken into account. Additionally, you must have evidence to support your profit intention. Taken under consideration is income you receive from your profession, job as a sole proprietor, business partner or unincorporated small business owner. It is important to note that income from an employer, such as salary or wages, is not considered.
Direct payments from clients for goods or services is considered business income. Additionally, the CRA looks at the following as sources of professional income:
These are just some of the sources of business income. Check with your tax professional before making any tax decisions.
The Statement of Business Activities T2125 tax form is used to calculate your business or professional income as a self-employed person. Use it if you are the only person in the business (sole proprietorship) or if you are in business with one to five other people (partnership). Take your gross income and calculate your net income after deducting all your business expenses like rent, home office, advertising, and business mileage. You need to know your adjusted income to file your taxes correctly. Remember, you must report all your business income or possibly face penalties from the federal government.
The CRA wants records of your professional income and expenses. It accepts multiple types of financial statements but typically wants original documents of: