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Take stock of your business income at tax time


Michael Kee on March 28, 2012 in Advice for Business Owners

Business income is a type of earned income, and is classified as ordinary income for tax purposes. It can be offset with business expenses and business losses, and may be either positive or negative in any given year.

You are required to declare your business income on your income tax return, by completing Form T2125 and then including your total income on the appropriate line of the T1 return. If you fail to report all your business income, you may be charged a penalty of 10 percent of the amount you failed to report after your first omission.

The penalty is even harsher, according to the CRA, “if you knowingly or under circumstances amounting to gross negligence participate in the making of a false statement or omission on your income tax return. This penalty is 50 percent of the tax attributable to the omission or false statement.”

It’s easy to become perplexed about the scope of your business income. For example, if you have not registered your business, you may assume you don’t have to fill out form T2125 and declare the business income when you are completing your T1 income tax form. Or you may figure that if you haven’t earned much in a particular year, what you have earned isn’t really business income. This is not the case. All the money you earn for your business is considered business income. For instance, in the event you have sold items for profit — no matter how few — you are engaging in a business endeavor, according to the rules of the CRA.

Other examples of business income:

  • You must claim government grants and subsidies as income or use them to reduce an expense. If a grant was used to purchase property that can be depreciated, you must reduce the capital cost of the property on your balance sheet and only depreciate the remaining value.
  • Any vacation trips or awards, which result from business pursuits, must be recorded as income.
  • If you barter or trade one good or service for another, the value of each good or service provided may be considered proceeds from a business operation. If you offer goods or services that are normally provided as part of your business, in a barter transaction their value must be included in your income.
  • Since rental income can be income from property or income from business, there is a guide to help you determine which you might have and how to report it see: http://www.cra-arc.gc.ca/E/pub/tp/it434r/README.html
  • If you sell a piece of capital property — such as land — for more than its cost it may be considered income you should report.

Bear in mind, the government expects you to declare your total income on your income tax returns. Whether your business earned income online or you received cheques from abroad, every dollar matters.

If you would like more information on business income for tax purposes, please contact me at .(JavaScript must be enabled to view this email address).