Completing the Canadian T1 Business Income Tax Form
How to Complete the T1 Income Tax Form as a Business
Filing your first income tax return as a business in Canada this year? If your business is a sole proprietorship or partnership, you'll file a T1 business income tax form - the same income tax return you use to file your personal income taxes. (If your business is a corporation, you have to file a T2 (corporate) income tax return.) Here's what you need to know about completing and filing your Canadian T1 income tax return as a business.
What you will be doing is declaring all your income using this one form, whether it is income from having a job and a business or income from one or several businesses.
Organize Your Paperwork
Prepare yourself by gathering your necessary papers and arranging everything you need around the computer if you are using income tax preparation software. You will need:
- Your business number
- Your social insurance number
- A copy of the Canada Revenue Agency’s (CRA's) Business and Professional Income Guide
- Your business records, showing your annual totals for sales, cost of goods sold and business expenses
Register for "My Account"
If you haven't already, registering with the Canada Revenue Agency's (CRA's) My Account online service has many advantages. My Account lets you manage your tax information and view payment history and assessments, as well as receive email notifications. See Canada Revenue Agency Online Accounts for Businesses for more information.
Entering Your Tax Information
Personal and Business Identification:
- Fill out the personal Identification section (the first section) of the T1 income tax form just as you would for your personal income tax. (One of the great things about tax preparation software is the ability to carry over information from the previous year. If none of this information has changed the software can fill it in automatically from the previous year's return - see Top Canadian Tax Software Programs.)
- The first step to figuring out your total income is to calculate your business income. To do this, you will need to fill out a T2125: Statement of Business or Professional Activities form. If you have more than one business, you'll need to fill out a separate T2125 form for each.
- Fill out the Business Identification section of the T2125 form. If you haven't done this previously you will need to know the 6-digit Industry Classification Code for your business. (See Industry Codes on the CRA website for a list.)
- Use your business records to complete the Income and Expenses parts of the Statement of Business or Professional Activities income tax form.
- If your business is a partnership, you will see sections on the form for filling in details of partners and for claiming "Other amounts deductible from your share of net partnership income".
When it comes to Business Expenses:
- Are you claiming motor vehicle expenses? The form contains charts to help you calculate your “Motor vehicle expenses”, “Available Interest expense for passenger vehicles” and “Eligible leasing costs”.
- Are you making a capital cost allowance claim as part of your business expenses? There are sections on the form to help you calculate your allowable claim. Capital cost allowance is covered in depth in Chapter 4 of the Canada Revenue Agency's Business and Professional Income Guide.
- Did you operate a home-based business this past tax year? If you did, you’ll want to work through the section of the form titled “Calculation of business-use-of-home expenses”. (For more on how to do this, including examples, see Calculating the Home Business Tax Deduction.)
Go back to the Total Income section on the first page of your T1 income tax return. You will see a subsection titled “Self employment income” near the end of the Total Income section. Enter your gross and net business, professional, or commission income on the appropriate line.
In the Total Income section, enter all your other income on the appropriate lines. (If you have a job as well as a business, for instance, you will be entering your employment income from your T4 slips on line 101.) Once you’ve finished working through this section, you’ll have calculated your Total Income – including your business income.
Continue filling out the rest of the T1 income tax form just as you normally would.
There! You’re done with your first business income tax return! All you need to do now is double-check it and then file it. (If you are using tax preparation software it can automatically NetFile your return.)
Use Accounting and Tax Preparation Software to Ease the Burden at Tax Time
Accounting software designed for small businesses can simplify many aspects of running a business, including tax preparation. With today's cloud-based accounting packages you can have all of your accounting information online in one place so you don't have to hunt down invoices, receipts and calculate income and expense totals by hand for your tax return. See The Best Accounting Software for Small Business.
As mentioned above tax preparation software has many advantages, such as:
- The ability to carry over information from previous years, including personal and business identification, Capital Cost Allowances, use of home percentages, etc.
- The elimination of arithmetic errors from hand calculations.
- Using NetFile to transmit the return to the CRA which greatly speeds up processing of the tax return.
Top Canadian Income Tax Software Programs provides a selection of CRA certified ones for you to choose from.