The type of income tax returns you have to file will depend on whether your business is incorporated. If you have an incorporated business, you must complete a corporate (T2) tax return for the business, and you must also complete a separate personal (T1) tax return. If your business is incorporated, the business losses (non-capital losses) cannot be used to reduce income on your personal tax return. However, the non-capital losses of the corporation can be carried back, or carried forward to apply against corporate income in other years.
If your business is not incorporated, then you only have to file a personal (T1) tax return. The income or loss from the business (proprietorship or partnership) will be included on your personal tax return. With your personal tax return, you will have to file a “statement of business activities” which includes an income statement for your business. If you have a loss from your business, and you have other income such as employment or investment income, then the business losses will reduce the other income on your tax return. If you have business losses which exceed your other income in the current year, this non-capital loss can be carried back, or carried forward to apply against income in other years.
Canada Revenue Agency (CRA) has a Business and Professional Income Guide (T4002) for unincorporated businesses, which provides help in completing the statement of business activities. The form on which you will report your income depends on the type of business:
|T2125 Statement of Business or Professional Activities|
|T2042 Statement of Farming Activities|
|T2121 Statement of Fishing Activities|
It can be very beneficial to seek the help of an accountant to set up your record-keeping when you first start your small business. After that, even if you are able to do your own bookkeep ing and tax returns, having them reviewed by your accountant or tax advisor can often save you money and avoid problems.
Unless you are trained in preparing corporate tax returns and are up to date on current tax laws, a T2 corporate tax return should be prepared or reviewed by a professional accountant.