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How to File Sole Proprietorship Taxes: Guide to Your Tax Bill

Marc Chaput
Graphic artist in her studio

Striking out on your own can be thrilling but don't forget about how this changes your tax bill. Let's go over how a sole proprietorship pays taxes on business income.

What is a sole proprietorship?

The CRA defines sole proprietor as "an unincorporated business that is owned by one person."  You're a sole proprietor if you don't have separate legal status from your business. A sole proprietor is the simplest kind of business structure. Basically, you and your business are one.  That means you assume all risk for the business. This could include your personal property and assets.  Setting up as a sole proprietor is quite easy. Just work as an individual and bill your clients directly. You can also operate as a registered unincorporated business if you want a business name different from your own. In this case, bill your clients with the business name. With a business name, you must have a separate business bank account if you want to process cheques.

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Pros And cons of a sole proprietor

By far, the best thing about being a sole proprietor is the ease of setting up. You may need to register with the government but it's a simple process.  Starting as a sole proprietor is cheap compared to forming a corporation. You are also in control of the decision-making and you receive all the profits.  On the downside, the CRA taxes those profits at the personal rates. This could put you in a higher bracket and make you pay more in taxes. You and your business are essentially one for liabilty, too. That means your personal assets could be at risk.

How to pay taxes on your business income as a sole proprietor

You must report all revenue from your business and claim all your business expenses. Be sure to file your return at the appropriate tax deadline.  You must file a T1 income tax and benefit return if:

  • You owe tax for the year
  • Received a demand from the CRA to file a return
  • Had a taxable capital gain in the year or disposed of capital property
  • Want employment insurance special benefits for self-employed people
  • Have payments for Canada Pension Plan/Quebec Pension Plan
  • Claiming an income tax refund or a variety of tax credits.

Remember, your overall income for the year for your sole proprietorship is determined by your net income or your net loss. This means taking your revenue and subtracting business claims like mileage.  Note: Some sole proprietors may have to pay their income tax by instalments.

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