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Self Employed

What Does the CRA Consider as Business Income for Taxes?

Rebecca Rustin
Fixing a bicycle

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.

What is your business income?

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.

What are some sources of business income?

Direct payments from clients for goods or services is considered business income. Additionally, the CRA looks at the following as sources of professional income:

  • Bad debts: Any amount you wrote off as bad debt in the previous year that you received during the current year.
  • Vacation trips: The CRA considers trips or awards you get as part of your business efforts as business income. Examples include items like jewellery, furniture or anything of value.
  • Reserves: You must bring reserves you claimed in a previous year into your business income for the next year.
  • Grants and Subsidies: Government grants and subsidies count as business income.
  • Bartering: If you enter a barter transaction, the goods or service you get are business income.

These are just some of the sources of business income. Check with your tax professional before making any tax decisions.

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Why do you need to know your business income?

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.

What records do you need to keep for your business income?

The CRA wants records of your professional income and expenses. It accepts multiple types of financial statements but typically wants original documents of:

  • Sales invoices
  • Receipts for expenses
  • Fee statements
  • Contracts
  • Cash register tapes
  • Any other record of business income.

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