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Everything I wish I knew running a sole proprietorship business

Hey you!

Yeah you!

I’m talking to you!

Don’t email me with your questions.

Please!

Read below

Update: This post is extremely popular and the comments are a wealth of information – make sure to read them. Please remember that these are just my experiences – I’m not a tax lawyer and and I cannot consult on your situation – so please do not call or email me with your questions. You should talk to an accountant, a book keeper or a tax lawyer. Or just call the CRA, they are pretty nice and have the answers your questions. Again, please don’t email me!

The new year marks the beginning of a new fiscal year for many businesses so I thought I would share a few things I have picked up over the past few years. I’ve run my web consulting business as a proprietorship the past three years and have picked up quite a few nuggets of useful information along the way. These things seem simple and almost laughable now, but as a greenhorn I wish I had known these before I started.

These tips are best if you are thinking about running a sole proprietorship (a business that is owned and run by a single person) in Canada but are helpful for other outside of the country.

Hire a good Accountant

I’m putting this one first because its by far the most important thing you should do when starting a business. My first year I paid someone $50 to do my taxes and I really got what I paid for. I had my taxes reassessed three times and had to pay the government more each time. The second year around I paid around $700 for the fantastic services of Waterford Tax & Advisory who did an amazing job straightening everything out and giving me some fantastic advice which saved me tons in the long run. A good accountant will always be around to answer questions and give you advice. You can’t afford to use a cheap accountant, trust me.

Ditch excel, use Freshbooks

This is a no-brainer for taking care of estimates, expenses and invoicing clients. At $33 a month, this is one of the more expensive services I subscribe to, but it is worth every penny. At the end of the year I’m able to export a few reports and send them off to my accountant – no dealing with spreadsheets. My clients love Freshbooks too – I often get compliments on both how easy it is to manage invoices and how professional my invoices look like.

Understand taxes – Personal and HST

Starting a business, you are probably coming from  a job where all your taxes are taken care of and at the end of the year, you get a nice little return from the government. Not so when you are on your own, take the time to educate yourself on what sort of taxes you need to pay in your area.

Personal Income Taxes: Running a sole proprietorship in Canada means you get taxed at the same rates as everyone else who isn’t self-employed. There are both provincial and federal tax rates that vary depending on how much income you bring in. You can run your numbers for both at the CRA website.

HST: I run my business in Ontario, and I need to charge all my clients who live in Ontario 13% HST – your province or state will have something similar setup. If you are making more than $30,000 a year  you will need to register for a HST number and start collecting.

So, the biggest lesson learned here is you need to pay a ton of taxes. As soon as you get a cheque, you should cut out anywhere from 35-50% (13% HST, 22-37% income tax)  – depending on how high your taxable income is – and placing it in another account to pay the tax man at the end of the year.

Keep every receipt and expense everything

The best thing you can do to reduce how hard you get hit by taxes is to expense every single dollar you pay to run your business. Again, this may seem like easy stuff to some, but its worth noting how this stuff works.

You only get taxed on net income, not gross income. So, if you get paid $1,000 for a project, but spent $200 on hosting for it, you will only be taxed on $800.

So, think of every little thing you use to run your business. Buying a new laptop, conference tickets + flights, printer ink, online subscriptions, software licenses… It all adds up quickly and can really help you reduce your taxable income.

As a business, you also don’t have to pay HST. So any receipt you have that includes 13% HST, you will get that back from the government when you pay your taxes.

Max out your RRSP

This is a good tip for anyone around tax time. Up until the end of February, you can contribute to the previous years RRSP. Anything you contribute to your RRSP is not taxed, so you can treat it as a huge expense. The amount you con contribute depends on your previous years income, but it could be as much as around $20,000. In Canada, this money is meant to only be taken out at retirement, but there is a special clause that lets you cash it out, without penalty, when you buy your first house.

Health Insurance is cheap

My wife recently quit her job to work independently beside me. While we are super happy with that decision, we lost the perk of health benefits. In Canada residents are covered for the big stuff like surgeries and doctors appointments, but not things like medicine, dental work and eyeglasses. Insurance plans are surprisingly affordable, starting at $60 for basic coverage. Kait and I went for pretty good dental, eye and prescription coverage and it was around $160/month.

One other thing, we shopped around on the net for insurance and we didn’t find any good rates, only after getting in touch with a broker did we find out its much cheaper to have a human do it for you.

Incorporate to save $$

Coming full circle to having a good accountant, mine suggested that once you start earning decent income or are working in an arrangement like Kait and I are, it would make sense to ditch the sole proprietorship and incorporate as a business. Its more expensive to incorporate a business (~$500 vs $60) and its a more work to get up and running, but its well worth the tax savings in long run. I’m only beginning to explore this world but I’ll be sure to follow up with a post after a few months.

That’s it

TL;DR : Hire a good accountant and explore every possible way that you can reduce your taxable income. Starting to run your own business can be confusing so hopefully these tips can help you.

Update: Check this comment for a lot more useful tips, thanks Martin

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207 Responses to Everything I wish I knew running a sole proprietorship business

  1. pren says:

    Any advice for sole prop. Vs Corp. In Canada for doing work for clients in the states?

    • wesbos says:

      I have quite a few clients in the states and at the end of the day it doesn’t matter. Billing American clients is easy as you don’t need to charge the 13% HST. Just remember that you still have to claim and pay full income taxes on american income. Your client may make you sign a W8BEN which just shows the IRA that you aren’t an american citizen.

      As always, check with someone who does this for a living, I just build the web 🙂

  2. Mikko Haapoja says:

    Great post man. Gonna send this to my bros they started a photography company about a year ago. From everything I read in this post it seems like they’re on track.

  3. Martin Mark says:

    Great post Wes!

    As a fellow Canadian freelancer here are a couple tips I use as well:

    To agree with your point – H&R Block is the devil – never use them for your taxes, I’d actually have been MUCH better off using TurboTax which I’ve done in previous years.

    Log your receipts – Receipts suck, even if you put them all away in a safe place throughout the year chances are the ink is going to fade on some of them. What I do is take pictures of all my receipts as I get them, upload to Dropbox, and then log them in my accounting software.

    On HST – An important point to clarify is that if you’re a sole proprietor and haven’t made your 30K yet, and haven’t filed for HST – you CANNOT charge your customers HST. Furthermore, if you’re subcontracting, buying services, etc. for your business you’re going to want to make sure you pick up the HST number of the proprietor if they’re charging you.

    After you register your HST number, it’s a little better because you can pass on the 13% HST charge to your customers and hold the money in savings until you pay it back to the gov.

    Be careful about the expenses – While everything you’ve said is true, I’ve worked with a couple funded startups that have had a less than amazing idea about how things like CCA and expensing works (“we have money – everyone gets a new iMac! Including the contractor who we’ve only worked with for a week”).

    For items that are tools for your completion of your job, you’ll only receive a percentage of the tax benefit depending on the tool.

    For ex. Adobe Master Collection falls under capital cost allowance – so I only get a percentage tax deduction over the course of a few years. Yet, I get to fully expense the Adobe Creative Cloud subscription, because it’s a recurring service my business needs (again though, because Creative Cloud is a subscription, I don’t own the product – I do get updates to the latest and greatest right away though).

    Also, company meals, are only expensed at a 50% rate – and you really should log who you’re with and what the meeting’s about – expensing a lot of meals is a good way to get audited.

    On Incorporation – I’m personally not incorporated, but I’m definitely thinking about it. Aside from the tax benefits I’m hearing more stories about freelancers who are running late on projects that are getting sued for non-delivery. I’d rather have my company liable vs. myself.

    Also, another avenue to look at depending on how much you make is maxing out your TFSA before maxing your cap room on your RRSP. Depends on your situation though, if you’re making more than 40-50K I’d suggest running your RRSP first and then your TFSA (speak to your accountant first as always though).

    Sorry for the wall-of-text 🙂

  4. Danielle Allen says:

    Can you (or anyone) recommend a good accountant for a startup freelancer in Toronto?

    Thanks for the tips!

    • wesbos says:

      Yeah you should check out waterford tax advisory (link in the post) and tell them I sent you. Really great and helped me out a lot. I’m also running a workshop on all of this but more indepth this sunday from 1-4 http://hackeryou.com/workshops/

    • Alex says:

      Contact cpa.cga.vaughan@gmail.com. They do a great job with tax, accounting, and bookkeeping – everything is done electronically these days…

    • Olena Stevenson says:

      I can help if you are still looking. I am working with few freelancers in Toronto, they can provide references. I did not mean to advertise myself, so feel free to filter me if you’re not allowing such stuff. I just want to help. I really enjoy your post, as my clients and myself, we all have the same struggles and dilemmas.
      I totally agree – everyone is going online with bookkeeping and filling – it works beautifully! But keep originals as safe as you can.

  5. Pingback: Everything I wish I knew running a sole proprietorship business | HackerYou

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  7. NKG says:

    thanks Wes, for posting useful information. I have quick question….

    Do we need work visa if we want to provide services to US clients on W8BEN from Canada (remotely)?

    I am self employed, provide IT services to healthcare clients.

    • wesbos says:

      No you don’t. The american company is hiring your company, which is Canadian, to do work for them. If you were being hired as an employee of that company, you would need it, but in this case the company is just choosing to do business with someone operating within Canada.

  8. Calvin says:

    Hi there,
    this is a great article, helped me a great deal. but I do have some questions
    first off, im a sole proprietorship and in the start up phase, and I am wondering how do I register my business NAME? my business will be operating out of the province of newfoundland?

    im aware of the not taxing until I make $30,000 but do I need to register my business name with the government? and if so where do I register? please help

    thanks

  9. Ray says:

    When working for US clients and receiving US cheques, do you file this as regular self-employment income and convert to Canadian on a T2125?

  10. Thank you so much. I wish I had read this advice a year or two ago – although I probably did, just not in such easy-to-understand terms! I am really heartened to find this crucial information, and can’t thank you enough.

  11. Irish says:

    I’m just looking into incorporating my company. The name is registered in Alberta but I’m looking to set up in Ontario. The biz is an online membership based website offering “groupons” to members and advertising (hosting)to participating locations (creative work sub-contracted out). I’m just launching with an office already set-up (along with website) and ready to prospect business, no capital, but want to incorporate instead of go sole-proprietary route for liability protection. Do you need capital to incorporate or can you incorporate and build capital as you grow? Capital converts to shares which will come later. I’m the officer, president, director, etc…no partners or directors. Any advice would be great. Thanks.

  12. Thanks for the great post, a lot of self-employed people don’t realize the tax consequences and claiming expenses for business activity.

    Andrew

  13. Nick says:

    I live in Ontario. I have a full time job yet I do vb programming on the side. I got my first huge contract to do a side job (under $5k) and I am wondering whether or not I should register as a sole proprietorship? If I don’t register I know I will be taxed only at my personal income level & realize that I cannot charge my client HST, but would I still be able to get back money from the government on receipts that include 13% HST? (i.e. If I purchase a new laptop, host a lunch for clients, etc) What about things that don’t have HST such as a parking pass? Can I claim that too?

  14. Hey Wes!

    Just stumbled upon your blog! Lovely article really helped me as Ive been freelance for a year. It’s so refreshing to get the real insight if all this business stuff from another creative! I will def be keeping in mind the advices, ESP the ‘keep all your reciept one’! Wish I knew that from the start!

    Ps I went to Rye with Kait! Help me say hi to her!

  15. Thia says:

    Any recommendations for a health insurance broker and/or plan? Thanks.

    • wesbos says:

      I found one with blue cross. They have brokers who will choose the best plan for you. If you want an introduction to my broker (and live in the GTA) I’d be happy to do so. Just shoot me an email.

  16. Matt says:

    Great Article,
    I am an independent app developer and am wondering if I should create a sole proprietorship or incorporation before I launch my app.
    It is a line of business app that will store company information in the cloud, should I be talking to a lawyer or getting some legal advice before I launch?

    • wesbos says:

      Yes, that would be smart. One of the biggest benefits for an corporation is that you have limited liability.

  17. Peter says:

    Great article.
    I have a question regarding the sale of goods in BC without a GST or PST account,we are now in the process of applying for these accounts, however would we be liable for taxes on goods sold prior to getting these accounts?

    • wesbos says:

      In Ontario, as long as you are under the $30,000 limit for the year, you do not need to back pay. So when I get close to $30,000 in sales I should register with the government and start collecting from that point forward.

  18. Viet Ha Pham says:

    Thank you for listing the pros and cons of a sole proprietorship. I’ve been looking into this and your post is extremely useful!

  19. Azriel Aharon says:

    I manage a non profit in the US and I contracted with a Canadian company in Ontario to do some consulting work for me. Do I have to pay HST on his services?

    • wesbos says:

      No, since you are an American, doing business in the USA your Canadian contractor will not need to charge HST. In Canada contractors need to charge the local tax of our clients, but since you are American, there is no tax at all.

  20. shayne gray says:

    Hi Wes – just going through the process now (in Ontario) and finding this very useful! It is a little confusing on the gov site, but I discovered you only have to register for an HST # if you’re revenue is greater than $30,000 PER QUARTER!

    I think I might hold off on that, although there are perhaps benefits to registering for one voluntarily (and yes, I would also rather my company be liable rather than me!).

    Quote from the gov site:
    “Small supplier – refers to a person whose revenue (along with the revenue of all persons associated with that person) from worldwide taxable supplies was equal to or less than $30,000 ($50,000 for public service bodies) in a calendar quarter and over the last four consecutive calendar quarters.”

    http://www.cra-arc.gc.ca/E/pub/gp/rc4022/rc4022-e.html#ss

    • wesbos says:

      That is incorrect, it means if you have 4 quarters together (April 2012-April 2013, for example) or 30,000 in 1 quarter (and zero in the other 3). Its not 30,000 per quarter.

      • shayne gray says:

        Hi Wes – just to clarify, does that mean your revenue could be $29,000 for all four quarters without an HST number? Meaning as soon as you exceed $30,000 in a quarter, you would be required to register for an HST number?

        Thanks again

        • wesbos says:

          As soon as you exceed $30,000 in a year (4 quarters) or 13 consecutive months, you need to start collecting. If you exceed 30,000 in a quarter, you are obviously exceeding 30,000 in a year.

          Just register for the HST number, it doesn’t cost you a dime and then you are allowed to claim HST on your own purchases back. Buy a $1000 laptop? Get the $130 HST back. Sweet deal.

  21. C-Dawg says:

    I’m still not sure if I should Sole Proprietorship or Incorporate!

    I live in Ontario and have a day job that pays a decent paycheck. I’m converting a house into a duplex and intend to rent out both units while I rent off someone else (mostly because I need to move to another City for work).

    Regardless of the structure of the business I will operate in order to hire an accountant, lawyer and property management company to deal with the operations of the property.

    The house must stay in my name.

    I want to limit liability but do not wish to pay high taxes. I understand that during the first year or two I might operate with a loss, saving me taxes.

    What should I do?

    What should I consider that I haven’t discussed!

    Thanks in advance!

  22. C-Dawg says:

    I should mention that I anticipate that gross income will be $24,000 minus all costs (accountant, lawyer, property maintenance and management).

    This will be less than the $30,000 benchmark.

    • wesbos says:

      Very important note here: The $30,000 is before expenses. So if you make $32,000 and had $29,000 in expenses. Just because you only made $2,000, you still are above the $30,000.

  23. Hieu Dinh says:

    Hi Guys,

    Thank you very much for all information on your website. I am confusing to register a corporate or sole proprietorship.

    If a corporate I have to pay for account everymonth ?
    If I do sole proprietorship I only pay at the end of year ?
    If I do sole proprietorship, can I make a tax return if I sell over $ 30,000 ?
    If I do a corporate, but the corporate at the beginning does have enough money to pay wages, so how do I should for ?

    I need your advice !

    • wesbos says:

      1. No, you don’t need an accountant every month, you pay for an accountant as you need it (usually once a year)
      2. Yes, you pay at the end of the year for taxes. If you make good money, they will required you to pre-pay taxes 4 times a year
      3. If you do sole prop and make $1, you still need to do a tax return. Income is income. If you sell a horse to your neighbour, that goes on your tax return.
      4. You can pay yourself dividens, look into that.

  24. Sheryl says:

    Hi Wes,

    Great blog post. Had a question regarding one of your points:
    “As a business, you also don’t have to pay HST. So any receipt you have that includes 13% HST, you will get that back from the government when you pay your taxes.”
    Does that mean I can get 13% HST on an expense like a business laptop back, even though I haven’t registered for a HST number i.e. I’m not hitting $30K in a year and therefore, not charging my clients HST.
    Saw in your previous comment that you mentioned this and got slightly confused: “just register for the HST number, it doesn’t cost you a dime and then you are allowed to claim HST on your own purchases back. Buy a $1000 laptop? Get the $130 HST back.”

    • wesbos says:

      Its a two way street. In order to get HST back, you must be collecting it. So if you aren’t collecting HST from your clients, then you can’t get that $130 from the laptop back.

  25. Debby Gies says:

    Hi Wes! I stumbled upon your excellent page as I was surfing google to try and find out what the heck to do. I am a writer, about to publish my first book in 2 months. I will be publishing with amazon and I have obtained an E.I.N. from the IRS I needed this in order to fill out the W8 for amazon so that they would not withhold taxes, they will look after the taxes but I am perplexed if I should just stay an individual and pay taxes on my royalties at the end of the year or do I need a sole proprietor? I can’t see registering for HST# because these are royalties and no Gst is being charged in the U.S.? What are your thoughts? I’d appreciate it.

  26. Kemar says:

    Hi Wes
    I am in the decision of registering a business (Renovation)
    and i would like to know if i should go with sole or incorporation
    i do
    Painting(interior& exterior),
    Flooring(tile, Laminate etc)
    Drywall(install,tape sand Mud)
    Carpentry (trims,Baseboard doors etc)
    Plumbing (tub, shower, vanity install/repairs drains repairs )
    Electrical (outlet,switches ceiling fan installations)
    Tiling (backsplash,shower stall,etc)
    General repairs
    and when im registering in the description of the business what should i put
    LOVE YOUR BLOG!!!

    than you in advance

  27. Hi Wes,

    In one of your comments, you said the following,
    “Billing American clients is easy as you don’t need to charge the 13% HST. Just remember that you still have to claim and pay full income taxes on american income.”
    The part that your making to remember that you still have to claim and pay full income taxes on american income, can you explain further what this means? At this time when I get paid from an American customer, Im not charging them tax and it is filed in my quarterly that I didn’t charge tax, but your statement sounds like Im still supposed to pay on what I received.

    My second question, Martin Mark commented on was,
    After you register your HST number, it’s a little better because you can pass on the 13% HST charge to your customers and hold the money in savings until you pay it back to the gov.

    So If when you first start your business and your not charging the 13%, why would you have to hold money in savings until you pay it back to the government? That is telling me that in time, when I do start to pay taxes, it is now coming out of my pocket, what I didn’t collect before?

    I know there is a time when you have to pay full tax back to the gov if you have donated a product. The total price of that product,s tax amount amount is to be paid, even it you received no money.

    I appreciate your time and great article. Im looking forward to a time I can sit in on a teaching of yours.
    Thanks,
    Dennis

  28. Seema says:

    2nd question

    HST

    If I register for my HST # is the HST I can get back only from purchases after I get the number? Or once I register and get the # I can claim all the business expenses that had HST for the year?? It makes a big difference to me as I’ve already racked up a bunch of HST on just set up fees. But I obviously just started and am not @ $30K yet.

  29. Dennis says:

    I lost my job through redundancy a few years ago. I’ve made the decision to work on contract basis going forward. I am thinking of operating as a sole proprietor. I came online to research how I should go about accomplishing this…and guess what your article is the first I came up on.

    Can you please tell me:

    1. How do I start a sole proprietorship? Do I need to register? If so, where?

    2. Do I need to come up with a business name?

    3. When I do a job for a company, do I charge HST or do I just accept the ‘salary’?

    Thanks much…and continued success in your business.

    Dennis

  30. Kendra says:

    I have a question regarding doing business with the US. If I’m a sole proprietor, and I am contracted to do business (in Canada) from an American company, do I charge them HST? Also, once I’ve made 30K+ and register for an HST number, can I claim HST on goods purchased for the company, even if my only client is an American(if I’m not charging them HST?)

    • wesbos says:

      You do not need to charge american clients HST. It does, however, contribute to your $30,000 limit. If you hit $30,000, you will have to register for it, although you may never bill it.

  31. Sarah says:

    Hi,

    I just have a quick question. Say I am employed as a full time employee at abc company and make $32,000 a year. I want to start a sole proprietor business but project that I will only be making $5000 a year. Does the $30,000 mark include income from my empoloyer? at what point should I get my HST number?

    • wesbos says:

      Its $30,000 in sales, so I’m 99% sure you won’t need it until you hit $30,000 in sales on your business. Your employer income won’t factor into it.

  32. RSL says:

    Very useful information thank you.
    I have just become a Canadian permanant resident and US citizen .
    I work as independent contractor for US firms and some want to have worker compensation. Wondering if I set up a Canadian business would my workers comp cover the US

    Thank you,
    Bob

  33. Michelle says:

    Hi Wes, I registered my sales business back in April. I only made $268 in commission the rest of the year, but spent a little over $1000 in product. I also have a receipt for a business trip I took to Vancouver, for just the meals I had while being there, also one other business meal receipt and a receipt for business attire. Where on my Canadian tax return do I enter this stuff, and how much can I claim out of my meals/business attire? It was a very simple business that I did not do much with because I started going to school a few months after starting it. I would much rather try and do my own taxes instead of going to H&R Block because they are unfortunately a joke. Any advice would be greatly appreciated! Thanks in advance!

  34. Patrick Miron says:

    Hi,

    You say you need to charge HST to clients if you earn above $ 30 000 a year.

    What if you’re just starting and you are unsure if you will reach the $ 30 000? Do you still charge HST to every client? Or do you wait until you hit the $ 30 000 in revenue mark to start charging?

    I’m a little confused.

    Thanks,

  35. Michelle says:

    Hi Wes. I just registered as a sole proprietor and will be contracting at a rate of 165,000 a year. Besides getting a good accountant is there anything else that is a must at this rate? I am completely new to this and a bit lost. I consulted an accountant who suggested I do the sole prop vs inc as it is just me contracting to a fly-in/out job. The company pays for flights from Calgary to site, and camp but the rest is up to me.
    Thank you for any help

    • wesbos says:

      If you are making that kind of money I would defiantly incorporate. $165k a year as a sole prop means you will pay an insane amount of taxes.

    • Michelle,

      While everyone’s personal situation is different, and this situation impacts the best business structure, given your relatively high level of income and low overhead it is probable that you would benefit from incorporating. Depending on your province of residence, this could also impact which province(s) you are filing returns in.

      Your accountant should also be advising you about ’employer employee relationship’ points in order to avoid the CRA deeming that you are an employee vice an independent contractor which could have severely negative tax consequences for you.

      If your accountant hasn’t given you a very good explanation as to why remaining in a proprietorship makes sense, then I would suggest you could benefit from a second opinion. We operate in most of Canada and would love to help, feel free to contact me.

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  36. ALINA says:

    Hi Wes,
    My husband works as a self employed carpenter. we registered a business just 2 months ago. We are not sure if he will have more than 30000 in self-employment this year as in the previous years he was employed. As I understand we don’t have to pay HST if earnings are below 30000, once hey are over 30000, we have to register and start charging clients. But what if income is 45000? do I have to back-pay my HST on the first 30000 earned, or do I pay HST only on 15000remainer. Or we start paying HST to the government only from the moment of registration? for example, If we registered for HST at 27000 we pay or do not pay HST for the first 27000 earned?
    Thank you in advance.

    • wesbos says:

      You pay HST once you register for an HST number. You must register at $30,000 or before. So if you register at $30,000, your $30,001th dollar gets taxed HST, not the $30,000 before that. If you register at $27,000, your $27,001th dollar gets taxed HST and not the $27000 before that.

      • ALINA says:

        Thank you very much Wes, All other sources are so vague about HST payments. I hope I understood your words correct… sorry for being a pain, we are new to self employment, I am already looking into getting in touch with accountant. So, in simple words, the first 30000 earned are kind of HST free (government will not charge us?) if we register at 30001?
        Thank you in advance.

  37. Susie says:

    Hi Wes,

    I have recently went back into consulting , I am register as a sole proprietor. I will be making approx 125k annually. Should I incorporate? What are the pros and cons for sole proprietor vs incorporate?

    • wesbos says:

      Yes, if you are making that much there are only pros to incorporating. You will save lots on taxes and put liability on your company rather than you.

    • Susie,

      In most (but not all) cases at such an income level, incorporating would be highly advantageous. Two major reasons.

      1. A corporation can retain earnings at a far lower tax rate than you can earn them as a sole proprietor. Though you still have to pay them out to yourself (and are therefore taxed)in some manner.

      2. As a proprietorship you are effectively paying yourself a salary from the profits of your hard work. A corporation can pay its employees and shareholders in numerous ways, each of which have different tax implications. Salary and dividends are two of the most commonly used methods. There is an ‘ideal’ mix for you and your business that is dependent on not only your gross revenue and profit margins, but also your personal situation (family status, spouses income, number of children, etc.) among many other factors.

      I would recommend you seek a good accountant to help you do more than just file your taxes, but also develop a tax plan based on your unique situation.

      I would love the opportunity to learn more about your business to see if our company would be a good fit for you, and help you develop such a plan!

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  38. jhkang says:

    Thank you for all the valuable information. I am new to self-employment. I am a new sole proprietor with a new US client. I invoiced them last week and I was asked to fill out the W-8BEN form. I have read that I should fill out a SS-4 form to obtain an EIN (Employer Identification Number) so that they don’t withhold taxes. Is this true in your experience? I have tried to contact the CRA regarding this but the agent was a junior and am waiting for a call back from a more senior rep.

    • wesbos says:

      I’ve signed many W-8BENs in my day, no problem there. I’ve never signed an SS-4 (or heard of it). I’ve never had taxes withhelf after signing an W8-BEN

  39. Johnny says:

    Hi Wes. Thanks for this information. It’s quite helpful. I have a question. I realize you’ve moved on to the Incorporated world, but would you know: at what point do you connect your HST number with your Sole Proprietorship? Do you have to get one before the other in order to associate one with to the other?

  40. Sher says:

    Hi Wes

    I own a very small business in Ontario (sole proprietor). This year I might be $31,000 but next year I could be $27,000.

    If I register for HST because I go over $30k by a bit, what happens next year if i’m under? I’m hovering around 30K so it’s hard to predict if i’m going to be uner or over and if i’m under i’d rather not charge HST if I don’t have to.

    Once I register though I assume there’s no turning back even if I make $20,000 next year? I’ll forever have to charge HST (until I close up the business I assume)?

    Thank you!

    • wesbos says:

      Correct! Once you hit it, you must register and continue from there on out.

      Many people make charging HST sound bad. It’s no skin off your back and you can even get HST you paid (for things like laptops and cell phone bills) back! Go ahead and register 🙂

      • Sher says:

        Hi

        thank you

        • Sher,

          In many (but not all) cases it is highly advantageous to be registered for HST, even if you are under $30K in sales.

          As Wes outlines, you get to claim the ITCs (Input Tax Credits) which is the HST that you incur on the expenses related to your business. One common facet that people overlook is the HST they incur on their home office expenses. 13% on your phone bill, electricity, internet, etc. that is a business expense goes along way and accurately recording this information is only a few extra key strokes.

          Depending on who you provide the service to, is also a factor. For instance if you are a sub-contractor to other businesses, the HST you charge them will simply go towards their ITCs, so they are indifferent, and now you can claim your own credits back!

          Many tax providers (ours included) will file your HST return for you on an annual basis at no additional charge.

          If you find this helpful and would like to hear more about what our company can do for you, we would love to hear more about your business to see if there is a fit there! Please contact me.

          Andrew Pickard
          apickard@fbc.ca
          (519) 476-1943
          http://www.fbc.ca

  41. John says:

    Hi
    I have online tech support business. All my customers are from USA. I charge them through my website ( credit card payments ). I am based in Ontario. Hopefully i would make more than 50000$ in this year.
    So should i register for sole prop or incorporation. I have no idea how and when i should pay tax and what is my taxable income . As i am getting money directly in my bank account from payment processor.
    Thanks

    • wesbos says:

      Get an accountant

    • John,

      It is hard to provide generic advice in such a situation, and I would caution you listening to anyone recommending a one size fits all solution.

      While incorporating offers improved flexibility as you are able to pay yourself in numerous different ways (salary, dividend, management fees, equity, etc.), there are also increased costs. Not only is registering a corporation typically much more expensive as Wes has outlined, your accountant will be required to send in different (aka more time consuming and expensive) information as part of your tax return.

      Further, beyond the simple dollars and cents of your business’ revenue, there is the issue of your personal situation to consider. Are you single or married? Do you have children and if so what are their ages? These are just two factors which many ‘tax guys’ fail to tell you about and coach you on when helping you make such a decision, because developing the optimum solution for each business takes time, and time is money.

      As for when you should pay tax, for most small business owners (partnerships and proprietorships) you are required to pay any amount owing to the CRA (Customs and Revenue Agency) by the end of April every year (this year May 5th due to the Heartbleed virus), and your tax return is due no later than June 15th. For those who run a corporation, their filing date and payment deadlines relate to their ‘fiscal year end’.

      It would appear as though you are down to crunch time to file your taxes for 2013 and need some good advice. I echo Wes’ comments, that you need some assistance. I recommend a good accountant or tax service provider.

      If you have any questions for me or would like to hear more about how the company I work for could help you in your situation, please feel free to contact me.

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  42. Janeen says:

    Hey, thank you for the information.
    I have a question, I work for the government of Alberta and my husband has a small business. It is a sole proprietorship. A friend of mine in his small business did our taxes and combined our personal and business taxes by making me the owner of 99% of his business and he owns 1% so that it would reduce the amount of tax we would need to pay. Now since the business has only been running for two years, last year after deductions my husband had a loss which then was balanced against my income. I hope I got all of that right of what I understood from the explanation given to me. Now my question is: is this legitimate, as my husband feels it’s a bit shady and was it done correctly. I realize there is limited info and I may not have explained it correctly.
    As well, what easy small business software should I get for him to use as I believe his ‘keep every receipt envelop system’ is not as effective as he thinks it is. As well do you have a recommendation for an accountant in Alberta.
    Thank you so much for any advice.

    • Janeen,

      Based on the brief information you have provided it is impossible to provide a 100% answer to your question, however a few red flags are raised to me here.

      The breakdown of a partnership (as it appears your business is now structured) is for the most part dependent on how much equity the partners have invested in the business (cash, assets, etc.) and how much work each partner does. I suspect that you didn’t invest 99% of the assets to fund the business, and it would appear as though your husband is doing almost all of the work. Therefore I wouldn’t be recommending to one of my clients to classify 99% of the business as yours and 1% as his, though perhaps there is more information I’m not privy to.

      There are numerous commercial off the shelf systems out there to track receipts. Our members obtain free access to a software package called Kashoo for instance, and other tax firms use different products. Ultimately you need to have ‘minimum records’, a day to day log of expenses and income as a bare minimum.

      As for a good company to work with in Alberta, I just happen to know one, the one I work for. We work throughout most of Canada representing over 50,000 Canadians involved in Farming and Small Businesses, and would love the opportunity to learn more about your husband’s business and explain the benefits of our approach! Best of all, when we take on new members we review up to the past 10 years of their tax returns in an effort to find mistakes(you would be amazed what people miss, or miss-file) and refile the returns. This service is included in the membership fee!

      I would love to learn more about your business to see if we would be a good fit, please feel free to contact me.

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  43. Wes,

    I love the blog post, you have certainly helped numerous small business owners or those with such a mind set learn a lot about taxes. I echo your sentiments – get a good service provider who can guide you on the complexities of your personal situation.

    Every business is different, and just because you’re in same industry doesn’t mean that you should be filing your taxes and tax planning in the same manner. Age, family situation, number of children, succession plan and business projections are just a handful of considerations that go into developing an effective tax plan.

    Does your accountant work with you throughout the year to help minimize your taxes, or do you just see them at the end of the year when you drop off your books?

    Does your accountant come to see you at your home or place of business to get a good understanding of your personal and business situation to take advantage of some of the points I mentioned above? Or do they just enter numbers into their computer and collect your fee?

    Will your accountant stand behind their work and represent you to the CRA if their is an audit or are you on your own? Is this representation included in your bill or do they charge you extra for their time?

    The reason I point these things out is most service providers don’t do these things for their customers. The service I work for, on the other hand we work hard to keep money in your pocket by empowering you to make effective tax planning decisions. You’ve never heard of a tax plan? We need to talk, please contact me!

    Andrew Pickard
    apickard@fbc.ca
    (519) 476-1943
    http://www.fbc.ca

    • wesbos says:

      Yes, yes and yes. My accountant does all these things and any accountant that is worth your time should. Thanks for sharing your toughts on this blog!

  44. Srid says:

    Hi Wes,
    Thank you for this blog. It is very helpful for me.

    I am new to Canada. I moved here couple of weeks ago with a job offer from a US company. I was working for them as permanent employee before and now I am working as an Independent contractor. They will deposit the salary amount in my bank account. Am I required to register as a sole proprietor? If I register, I may have to rewrite the employment agreement and give them new bank account on the name of the firm? Can I just continue the way things are and pay the taxes in next April?
    Thanks.

  45. Brad says:

    Hi Wes

    My wife and i own a corporation that only makes 65k /year. My accountant says he wants us to go to a partnership as it is easier to manage than the corp and because neither of us have other jobs. He suggests it wont cost more in personal taxes and it will make it easier to get personal finance as our gross personal earnings will at least be shown over the little we try and take out of the corp. Any thoughts would be appreciated.

  46. alicia says:

    Can you invoice a client (side job) without registering as a business? Of course still paying the required taxes

  47. alicia says:

    Can I invoice a client without registering a business yet? Of course still paying the required taxes

  48. Melody says:

    Hi Wes,
    Thanks for the information you provided in the blog. I have a question for you. I have a full-time job, where I pay taxes, EI & CPP. I am now in the process of starting a very small company with very little income, maybe $10-15K a year. and for the most part that will not get much higher. I am still very much torn between corporation and sole-proprietorship. I really can’t seem to find at what rates you are taxed. I would like to go with the lowest tax rate I can, even if it does mean a little higher start-up cost. I am also wondering, what happens if I have the sole-proprietorship and get laid off from my other job, and I still able to claim EI even though I do have a company that I am technically “self-employed” by? Would that I mean I should stop paying into EI now, cause technically I will never be able to receive it? Thank you in advance for your knowledge

    • Melody,

      Typically at such a low level of income it wouldn’t be advisable to incorporate due to the increased costs. The start-up costs have been touched upon before in the blog, but on an ongoing basis the costs are higher as well. This is mainly due to the fact that a corporation has to file additional (read more complicated and time consuming) reports.

      Given your unique circumstances however, it MAY make sense to incorporate. The company I work for in additional to filing taxes also helps business owners make well informed decisions such as the right business structure. If you would like to talk with us further, please don’t hesitate to give me a call!

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  49. P walker says:

    Hello Wes looking for some advise looking to open a company in Nevada. Is it recommended to do so, and still have services in Canada?

  50. Ruth says:

    Thank you for the great post!

    I have a wondering about insurance. You have stated that you have health insurance, but is you have any other liability insurance for your business that you pay in addition? I’m in the research stages and wondering what is most helpful/crucial as sole proprietorship.

    • Ruth,

      Though my focus is as a Tax Consultant, I often run into current and potential clients who have insurance related issues and questions.

      The rule of thumb is, talk to your insurance provider. Depending on the nature of the business, the needs could be very different. For instance, I was talking with new clients recently who have a greenhouse operation and sell direct to consumers. Pulling into their sales area off of a busy highway, the need for liability insurance immediately came to mind.

      One unique opportunity most small business owners miss is the opportunity to turn personal medical expenses into pre-tax business expenses. While not an opportunity available for everyone, for some business owners there are insurance products available that allow for this (legally) and can save significant tax dollars.

      If your believe your business could benefit from such a product, perhaps we should talk further.

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  51. Kris says:

    Suppose a newly formed company is registered under HST, expecting revenues to cross $30000 in the near future, but in the mean time is making revenues less than $30000 should the company need to raise tax invoice to its customers?

    • wesbos says:

      Yes, as soon as you register you need to start charging HST, even if you register for HST at $2,000. The next dollar needs to be charged HST.

  52. Peter says:

    Great blog. I am currently employed earning a decent salary in the 90k range and I am starting small business importing fashion goods to sell online. If I add any profits to my current salary from a sole proprietorship the taxes are insane. Am I better off incorporating because of my current salary or is it really close to a wash at the end of the day when I pay myself out from the corporation?

    Thanks

    • wesbos says:

      If you intend the money to be in your own pocket at the end of the day, there isn’t much you can do about getting taxes. Income is income. There are some nice benefits on the first 30k you pay yourself with dividends from a corp, but your other income will cancel those out.

      What would I do? Keep the money in the corp and have it taxed at 15%. Then, when your income is lower (or you have a significant other you can pay as a shareholder), you can take it out at a lower tax bracket.

    • Peter,

      Deriving a taxable benefit from your corporation is a function of numerous factors, the most common ones being net income (profit), your taxable income from other sources (such as your job), and an effective tax plan.

      The strategy Wes is suggesting makes sense in general (retaining the profits in the corporation at the Small Business Deduction rate, and drawing it at a later time when your income is lower), but there may be other factors (personal situation, near and long term plans, pensions, etc) that would negate such a benefit.

      Also, increased fees (both start up and ongoing) may make it ‘close to a wash’ at the end of the day, again all situation specific.

      There may also be benefits to starting the business as a Proprietorship / Partnership as a proof of concept for a year or two in the event that it doesn’t prove to be as profitable as you had forecast, to avoid fees, etc related with initiating and shutting down a Corp. Note that tax savings is only 1 of numerous factors to consider when considering incorporating, if your lawyer is recommending to incorporate for liability reasons but there is no benefit from a tax perspective, I think it would be silly not to heed your lawyers advice.

      Generally if I see value in a client incorporating for tax savings I will project for them their taxes year to year to show the savings, weighted against increased costs. I would also discuss longer term plans / implications (the ability to pay a dividend out at a later date from retained earnings for example). In short, there is value in having a tax consultant come up with an individual plan for you and your business, everyone’s situation is different, and every tax plan should be different.

      Feel free to contact me if you would like to discuss your situation further.

      Thanks,

      Andrew Pickard
      apickard@fbc.ca
      (519) 476-1943
      http://www.fbc.ca

  53. Steve says:

    Holy cow!!!! I am so overwhelmed. I’ve been freelance copywriting for a month or two now on the side of my full time job and I’ve made a little bit of money. As that starts to become more and more consistent I am strongly considering setting myself up as a legitimate business but this is one area that I have next to no knowledge about. This stuff has been helpful thanks so much.

  54. Anshuman says:

    Hi, the blog is really helpful. I had one quick question. Throughout the year, I have been paid in cheques addressed to me. Now that I’m close to $ 30 K, I will register for an HST/GST account. Do I need to register a business name along with that ? Will the cheques then be addressed to my business name and consequently, will I have to open a separate bank account for the business ?

  55. Ingrid says:

    Hi Wes, I am self employed. My invoices up until now have simply stated that the cost includes gst. Do I need to be showing the breakdown of cost for service plus the gst? Or just the total cost OK?
    Thanks

  56. Lisa says:

    Hi Wes,

    I am looking to register my photography business very soon. My residence is in Gatineau (Quebec) but 99% of my clients will be from Ottawa(Ontario). It seems like the personal income provincial taxes are much lower in Ontario then in Quebec. Along with the language restrictions, would you recommend registering my business in Ontario instead of Quebec? I do know that I have to have an address in Ontario and I am looking into a Virtual Office plan with a $30/month fee. Just curious if it will even out with the high taxes in Quebec.

    • Ski Man says:

      You have to pay personal tax where you live. You cannot pay personal tax on Ontario if you do not live there. To do what you are thinking you need to start a corporation in Ontario and pay corporate taxes there, however if you are resident in Quebec, you will pay personal tax there.

  57. Natalia says:

    Hi Wes,

    Your article is great and I am going to forward to my freelance pals who have zero clue about this stuff.
    Here is my concern: I registered my business last January 2014 and I set up my HST reports as Quarterly. It has been my first year of business, and I was presumptuous in thinking I would earn more than 30K for the year. I earned less than this, however, I still charged my clients HST.

    What happens now? Do I still need to pay my HST back to Canada Revenue even though I earned less than 30K? Do I need to file at all?

    I’m very confused.

    Your guidance would be much appreciated.

    Thank you.

    • wesbos says:

      Yes – once you register for an HST number, you have to start charging HST. The 30k limit is for the latest you MUST register, but if you registered before that and collected HST that is totally fine.

      So, since you collected the HST, you must pay it and file your taxes. If you only made $50 and collected HSt, you still have to pay that HST as well as pay taxes on the $50.

  58. Amanda says:

    Hi Wes,
    Great post! Tons of great information.

    A few questions – I will be hosting 7 workshops in the states next year – Boston, Fort Lauderdale, New York, Philadelphia, Minneapolis, Charlotte and Santa Barbara. I’m currently residing in Ontario but am a dual citizen and hold citizenship in both Canada and the US.

    In charging a fee to attend the workshop, do I charge some sort of tax? If so, will that be determined by the individual state? If so, which tax?

    Would it be smarter for me to claim Florida residency again, as that is the state in which I lived for many years?

    Is it possible for me to be a resident of FL and live in Canada at the same time?

    Grateful for your advice.
    Thank You!

  59. Yam Cooper says:

    Hi Wes,

    Thank you for this article!

    I am an author, illustrator and motivational speaker dealing with topics of anti-bullying and self-esteem among children. I am looking to sell my books at various locations such as malls, who require that I have liability insurance to be in place if I am to be vending on their premises, in case some guy falls around my table and he sues me/the mall,

    Do you have any recommendation on where I can find liability insurance that is low cost for this purpose? Currently the quote I received is way over my budget as a small sole proprietor.

    Thanks!

  60. Alex says:

    Hi Wes,

    Great post! Thanks for all the useful info!
    I started a sole proprietorship in Feb/March 2014 and also registered for an HST number.
    My first invoice was mid March 2014 and I’ve collecting HST since. The overall income so far is under 30k
    My questions:

    1. When should I pay the GST?
    2. When should I file the income taxes of the sole proprietorship?

    Thanks a lot in advance!

    • wesbos says:

      Both will be paid at your regular personal tax time in April – you can file for 2014 now though to get it out of the way.

  61. Annie says:

    Hi Wes, great post!

    I’m really lost and confused with the tons of information on the CRA website. I’m temporarily residing in Toronto and I’m working as a self-employed translator here since August 2014 (I’m not Canadian). I make less than 30K/year, so I assume I do not have to register for HST, but I did register my business last week (sole proprietorship).

    My question is: is the form T2125 the one I should be filing? Should I really file it even when I’m not registered for taxes?

    I’ve been told there’s a good place (a chain?) that helps filing taxes forms and they charge between $30 and $200 according to the individual’s case – as I’m not a permanent resident nor a citizen, and my business did not start here, but in Europe a couple years ago; do you know which company this is?

    Any suggestion/advice would be much appreciated.

    Thanks and congratulations for this post!

  62. Andrew says:

    Have done consulting work in December 2014 and now am invoicing client in Jan/Feb for this work. Does the income and HST contribute to 2014 totals or 2015? Thanks very much.

  63. christine m says:

    Hi there,

    I am an art director who starts a freelance gig on Tuesday so I’m looking to get my company registered ASAP and didn’t realize how confusing it can be so thanks for this article. Is there a pro/con to incorporating (sole proprietorship) federally vs provincially (ontario). from the limited research I’ve done it looks like it’s $200 for federal and $300 for ontario.

    Also, any terminology advice for picking a name (i.e. should i use the word ‘consulting’ in the name) or does that matter for tax purposes?

    thanks, Christine

    • Ski Man says:

      Incorporating is not the same as Sole proprietorship. The name of your business has no bearing on HST, GST or Income Tax. You don’t even need to register a business name at all if you are a Sole proprietor and not a corporation.

      • mains de mariposa says:

        That’s actually not true. The only time you don’t need to register the business is if you are using ONLY your exact name as the business name. But if you add any other word to your business name or use anything other than your own personal name you need to register the business name (at least in Ontario you do). So if your invoices simply say “Jon Doe”, you’re good. But if your invoices say “Jon Doe Consulting” you need to register that name.

        If you’re in Ontario, this website walks you through it and you can register online immediately. A sole proprietorship is $135.

        If you’re in another province, look for their Business Development group.

        https://www.bdccanada1.com/bdc_order/index.php?website=index&page=login&op=index

  64. christine m says:

    I’m just discovering that the first part of my comment may be a bit confusing. what I’m seeing is that if you are registering as a sole proprietor you are NOT incorporating, correct? If I want to become a sole proprietor do I simply register my business name on this site? http://www.canadabusiness.ca/eng/page/2730/sgc-35/#sgcselect

    thanks,

    Christine

    • Ski Man says:

      You are born a Sole Proprietor, it is not required to register a business name to start doing business. There is some advantages to registering a business name such as being able to open an bank account in your business name and other situations like this. Usually you would register a Sole proprietorship with your provincial agency.

  65. Mary says:

    Hi Wes,

    I have been working in the corporate world for many years and found myself out of a job a couple of years ago. I found a job in sales (working from home) and being paid 100% commission, hopefully exceeding $30,000 this year.

    My question is; would it be best to register as a sole proprietor or consultant? The company that I work for has suggested this.

    I would appreciate your professional opinion, Thanks Wes

  66. Elissa says:

    Hi Wes,

    Im looking into incorporating versus running a sole proprietorship, but am clueless with what I need to do in terms of record keeping/reporting/what needs to be saved after each sale. It is a water filtration company that involves both wholesale sales and retail sales, as well as installation.

    Is there a course or a company I can go to that will do all this for me?

  67. Gili says:

    Hi Wes,

    Did you end up incorporating? If so, what has been your experience?

    Thanks,
    Gili

  68. Having read this I thought it was very enlightening. I appreciate you taking the time and effort to put this article together. I once again find myself spending a significant amount of time both reading and posting comments. But so what, it was still worthwhile!

  69. Pingback: Forth and Wild - Friday 5

  70. Tina says:

    Thank you for the great info! I will get an accountant as soon as I am able to afford it.

    I have a question. I took and paid for training courses in 2014 with the plan to start a sole proprietorship as soon as I am done. This training was not at an educational institution such as a university, but a non-profit company. Due to the length of the training courses, I was not able to begin making money as a sole proprietor until 2015. Can I write off the training courses in 2014? If yes, how? Under my sole proprietor ship company as an expense or under general education?

    Thank you

  71. Simone says:

    Hi Wes,

    Informative Blog!

    I own a very small business in Ontario ( as a sole proprietor) grossing between 30,000 to 100,000 yearly(doing renovations). I have two workers who I sub the work out to, whenever I get a new contract. Do I need to do up a T4 for them? It so which one?

    Let me know.

    Cheers,

  72. Crystal says:

    If I own a corporation, can I invoice the corporation a consulting fee rather than taking dividends/payroll? Then I suppose my personal tax return would still continue as a sole prop. Can that be done?

    • Ski Man says:

      A personal tax return is always necessary if you are putting money in your pocket. If you receive payouts from the corporation it can be taxable on your personal return. But if you pay yourself as a consultant you will pay the personal rate on all the money. If you take the money out of the corporation as an owner you will be protected from some double taxation and generally pay lower corporate rates.

  73. shakti says:

    hello
    who did you go to for health insurance
    ive a small business and i need it urgently
    many thanks for a great post
    shakti

  74. Josh says:

    Hi there,

    Great and informative article. Quick question – what exactly constitutes income, does “free stuff” count? And does it make a difference if free stuff is the only thing you receive? In my case, as a golf blogger (which isn’t my livelihood), I may receive free golf, and am going to be receiving “free” apparel soon in exchange for writing a review. I haven’t to date been receiving any cash compensation related to my blog.

    If “free stuff” does constitute income, then obviously all associated expenses would be eligible to include in a tax return as well?

    Thanks for your help!

    Josh

    • wesbos says:

      Good question – yes – anything that you receive as payment is considered income so you need to claim the value of those goods. Best to chat with your accountant.

  75. Max Quagliotto says:

    Wes! I never knew (I should have spoken with you a loooong time ago!). I do some freelance web-development on the side and just registered a BN (Sole Proprietorship) but am still confused about a lot of things business-wise. This blog post is so relevant to my situation and I’m now considering hiring an accountant to assist. Anyway, thanks for this. So to reiterate: There’s no harm in registering for HST right away, correct? And if I do, I HAVE to start charging HST on all my services right?

  76. taryn murphy says:

    Hi!

    I read this article from time to time as I am SO confused about taxes!
    You make it so simple and great. I do however have 2 questions.

    This is my first year in business- its going great, i have filed for an HST number.
    I branched out into the world of interior design (from furniture making/refubishing) and i purchase all furniture/decor for my clients- and then they pay me back. and THEN i charge a certain amount for my services.
    Do i have to charge HST when they give me the expense (ei, furniture decor) money back?
    I get so confused as I have already paid HST on these items and I didn’t make profit on them! Its just a straight number in my account (which I’m not sure if i ever get audited that they will know this)

    what should i do? charge HST?

    also. a lot of my purchases are online (kijiji and craigslist) how do I account for those as an expense as i don’t pay hat and there are no receipts given.

    Let me know, your help would be so greatly appreciated!!!!

    thanks!

    • Ski Man says:

      Not getting a receipt is not an excuse. If you can’t get a receipt then don’t buy the item or you won’t be able to deduct it. If someone sells something they should be prepared to give a receipt unless it is illegal.

  77. Bryan says:

    Hello,

    I have a unique taxation question.

    Let’s pretend that my company is “Aeromiles”. I am the middle man between “Vendors” and “Customers”. The money flow is as follows:

    – “Vendors” order $10,000 of services from “Aeromiles”
    – “Customers” earn miles
    – “Customers” want to spend miles on “Vendors” products
    – “Aeromiles” purchases $9,000 of “Vendors” products on behalf of “Customers”
    – “Vendors” ship directly to “Customers”

    So basically, “Aeromiles” is getting paid $1,000 for services (since it’s recycling most of the money back into the “Vendors”).

    Thus, my main question would be: Can I deduct the $9,000 in purchases as a corporate expense? And if so, what category would it fall into?

    Thanks!

    • wesbos says:

      All those “quotations” make it look like a money laundering scam! You should get an accountant or call the CRA.

      • Bryan says:

        It seemed easier to read with quotations (and obviously I’m not proposing a money laundering scam :)). The CRA website seemed to have no info on the subject, so I thought I’d give this website a shot.

        The business model is basically the same as Aimea’s Aeroplan reward system. From my understanding, Aeroplan gets money from vendors for every mile earned. When customers decide to spend miles, Aeroplan places an order directly to the vendor.

        Now from Aeroplan’s tax perspective, are unused miles considered deferred liabilities, and used miles considered liabilities (and thus deducted from taxes). It’s essentially a question of: Does Aeroplan pay taxes on miles that are owned by their customers? Or do they just pay taxes on the % cut that they take from the service?

        I’m trying to develop a system where 90% of the money earned is transferred to customers in a reward system, and only 10% is actually taken by me as an operating expense. So I definitely need to ensure that I’m only paying taxes on the 10% and not the whole 100% (as the taxes alone would dwarf my profit).

        Bryan

        • Ski Man says:

          Seems pretty simple to me. Your Gross Revenue is the 100% part. Then you subtract your expenses which is the 90% part. This leaves your Net Income which is the 10%.
          Simple accounting, talk to one.

  78. Jay says:

    Hey Wes, I’m a sole proprietor for a Graphic Design business I run myself in the Windsor area… My fiance is pregnant and I’m looking into getting Health Insurance for my growing family. I read that you used a broker to help you find the best deal for health insurance. Who did you use? Or where can I find a broker to get the best and/or cheapest Health Insurance for me and my family?

  79. Courtney says:

    Hi there,

    Great article, hoping you can help me too!
    I have an online store, and I want to register it in Canada, but it caters to the United States, Europe and Canada. I also work mostly with drop shipping, so I never see the product, it just ships right from my supplier to my customer. What should I do? I know that in the United States they register for a re sale tax except, do we have that in Canada? My main product is SUP boards, so for the people who I sell to in Ontario should I just charge them the same and eat the tax I have to pay at the end, each board is around 900 dollar?

    Or should I not register my business, I am also currently in Spain so can I claim internationally? I am thinking, maybe its best not to register until I have made over 30,000?

    Thanks,
    Courtney.

  80. Hey, I just wanted to say thanks for making this post. I found it on Google.

  81. JeffreyH says:

    Question: do I need to be registered for an HST # in order to claim back HST paid out? And I have been told that I can claim back HST for every single thing I’ve purchased (even not business related); is this true? Thanks.

    • wesbos says:

      Yes, you must have an HST number to claim back HST you paid out. For example I can claim back HST I paid on a laptop because I also collect HST.

      And no – you can’t get HST back for personal expenses – that wouldn’t make sense. If it’s not for your business, it’s not a business expense.

  82. Todd says:

    What a great thread! Thank you!

    2 questions:
    1) I have a full time job making $70k/yr. I also have a very small sole proprietor biz making $10k/yr right now. Taxes scare me. Is it worth incorporating? My wife stays at home with our young children.
    2) My business doesn’t really begin until the snow melts, therefore, i don’t start to get business income until April or May. Can i still claim expenses for the entire year?

    Thanks

    • wesbos says:

      1) I’m not sure if it’s worth it at 10k because the savings would be minimal, but the fact that your wife stays at home is a great opportunity to have her own part of the business and pay out dividends to her.

      2) Yep – there are many seasonal businesses that take a loss during down months. That is just part of the business and the government can’t fault you for losing money in those months.

  83. Dee_l says:

    Hi – I registered for an Ontario Business Certificate and thought that by adding RT 0001 at the end of that number that was the same as HST (CRA) number.
    I used that number to charge HST on about $6K worth of services. 1) I did not hit the $30K threshold in 2016 and (2) I used the wrong number for HST purpose. I am now going to register for an HST number going forward in 2016. Question: can I reimburse the client for the HST that I should not have charged them? Or do I send the collected HST to CRA? (and how do I do that…using the new number I will get or just by way of a letter explaining my mixup)

  84. Ritzy says:

    Hi Wes !! I have registered a sole proprietorship company in Toronto and working as an contract employee with 26 K yearly package .I want to know that still have to pay 30% taxes from my yearly package if yes then how to handle the taxes part.
    or below 30 K are not laible to pay any taxes ..Please help !!

  85. Igor says:

    Hello !
    Great post, thanks a lot!
    I have a question to 🙂
    I am new in Toronto and started working independently from Jan this year (2016)

    I am working for a tv company and they pay me by a fixed amount by cheque every month. So far it was the first cheque and I just gave than an Invoice (free form made in MS Word ) so do I have to take 13% from the amount and put it on the side ?
    Didn’t register anything so far.

    Do I need to Register an HST now or should I wait for a while and register it afterwards ?

    As well as if I register an HST do I have to open a business bank account or can I just use mine?

    Really new to all that and have a mess in my head :/

  86. Helen says:

    Hi Wes – Great article. My husband runs a side sole proprietor business and is HST registered making between 5 and 10K gross. Early last year we had some large expenses for equipment but due to unforseen circumstance did not take in much business / income. Therefore our HST paid out was higher than our HST collected. This is a first for us. We do have an accountant we will talk to but do you know how it will work for filing our HST? Can we hold onto some of last years expenses and claim them this year to reduce this years HST collected. Thanks for any info.

  87. Jenny says:

    Great blob Wes.

    My husband has a small contracting business…in which he passes on the “supplies” at his cost… doesn’t make any money from it.. only makes money on his labour. He shows material and labour on the invoice, and then a combined total.
    If he counts only his labour, he is below the 30,000 mark, however if he had to count the whole invoice, he would be over.

    He thinks he is fine just to show the labour, as he didn’t make money from the supplies.

    Is he correct?

    • wesbos says:

      No – you can’t do this. You are describing business expenses and it counts towards your total. He can claim the supplies as an expense and won’t be taxed on that amount but you still need to be charging HST after 30k in sales. Even better is that he will be able to claim that HST spent on supplies and get it back

  88. Tim Tyz says:

    Hi Wesbos!
    Thank you for the great article.
    I’ve just finished my first year as a corporation, and plan on paying myself a salary starting this new business year. What do I need to know to maximize my non-taxable income. (Please note I am in Alberta)
    I’ve heard I do not need to pay EI/UI, do you have any recommendations on things I need to pay VS things I need not pay?

  89. Phil says:

    Great post – I’m a new free-lance here in NY and was wondering at just what point, whether it’s a yearly dollar amount or being in charge of x – amount of people that you should make the jump to LLC? In my line of work (mostly head shots) and the occasional wedding (mostly assisting) I don’t really see or come across instances of being at risk of being sued (which is what I gather the main benefit of an LLC is) I do currently have a lot of write-offs from online services to you name it. Am I better off just staying sole-proprietor for the time being? Thanks!

    • wesbos says:

      It really depends on how much you’re making and since you’re in the US I don’t totally know I’d say in Canada it’s about $80,000 but your best to consult with an accountant in your area. It’s worth looking into since you could save a significant amount of money on taxes

  90. Josy says:

    Hi Wes, I went through all the posts and didn’t find my question, so here it is. I am buying a commercial building and am being advised to get an HST number so that the seller does not have to charge me HST on the building. There will be tenants on the 2nd floor and I will have retail on the ground floor. Will I have to charge my tenants HST as part of my “business”? My agent seems to think the answer is yes, but that seems weird. I also have tenants in another building and there is no way I can start charging them HST as well…
    Thanks for any insight!

  91. jr says:

    As a Canadian thank you for this.

  92. Igor says:

    Hello !
    Great post, thanks a lot!
    I have a question to 
    I am new in Toronto and started working independently from Jan this year (2016)

    I am working for a tv company and they pay me by a fixed amount by cheque every month. So far it was the first cheque and I just gave than an Invoice (free form made in MS Word ) so do I have to take 13% from the amount and put it on the side ?
    Didn’t register anything so far.

    Do I need to Register an HST now or should I wait for a while and register it afterwards ?

    As well as if I register an HST do I have to open a business bank account or can I just use mine?

    Really new to all that and have a mess in my head :/

  93. Mohamed says:

    Hello,
    Thank you for a very useful post and excellent pointers!
    My question is about the incorporation phase: did you end up incorporating provincially or federally? Care to share some of the thought process as to why one vs the other? Do your clients care?
    I am contemplating incorporating a small IT consultancy. I’m based in ON, but -hopefully- my clients will not be limited to the province. I wonder if it’s OK to just incorporate provincially (in ON) and still be able to do serve and bill clients in other provinces hassle-free? Or would I have to “register” in every province I plan to have a client in? If it’s the latter, I guess incorporating federally (rather than provincially) would make more sense…

    • wesbos says:

      Good question. I did it provincially but I don’t really understand the differences between provincially and federally reason I did it because I primarily do my business in Ontario

  94. Below the life insurance coverage policy, a particular percentage of the death
    benefit is paid for every month the policyholder needs lengthy-term care.

  95. Kay says:

    Hello Wes,

    This is a helpful post, thanks. I just registered for a HST account. Can you point me to where I can read up things that I can expense under my sole proprietor business? I want to find answers to questions such as if I buy a book that helps in my business, can I expense it, etc. Thank you!

  96. Bill says:

    Hi Wes, great site!
    I am currently a sole proprietor, however, strongly considering incorporating myself to protect my liability. I will never have employees, and my wife is unemployed. My annual revenue is $55,000. I have seen a number of sites that suggest incorporating actually allows income splitting by paying dividends to my wife, which seems odd, if I am doing all of the work for the business. Is this really legal? And is incorporating a bad idea at the $55,000 level, or do you have to be earning 6 figures to make it worthwhile? (I have minimal to no expenses) Thanks!

    • wesbos says:

      Totally legal, this is what I do with my wife. I’d say it’s worth it and then work on increasing the revenue

      • Bill says:

        I came across some sites speaking of Personal Services Corporation “PSB” that quite honesty scare me. In my current situation, I could definitely see the CRA saying that I am really acting as an employee, as I only work for the 1 company right now, and they have actually expanded their demands to the extent that what was originally going to be 20hrs/wk grew to 40hrs/wk, so I really could not say that I have the time to find more customers. I also use their equipment, as they need data input into their systems (they don’t want outside equipment that could cause problems). Down the road, I am hoping to find a way to work out of my home, but I am not sure they are willing to allow this. Have you come across the PSB issue, and if so, do you have any advice?

  97. Steve Wilson says:

    Just wanted to drop a note regarding HST and US Income. I run a small Canadian consulting firm. My clients are exclusively Canadian provinces or US State governments. All of them are exempt from HST. HOwever I pay HST on almost everything I need to perform my services. (I generate reports from my work-at-home office and transmit them electronically to my clients). Every year my account files an HST return – since I collect none I get a healthy reimbursement of all the HST I paid in the year to generate income, including the portion of work-at-home expenses I paid GST on.

    In regard to the W8BEN – before I engage with a US client I send them a completed W8BEN form that basically avoids any withholding tax that would otherwise be remitted to the IRS. Since all the work is conducted in Canada, by a Canadian firm and is not “effectively connected with services performed in the US, a section of the Tax Treaty between the US and Canada allows me to pay income tax only to CRA on US income.

    You can declare your US income using either the exchange rate on the date of deposit or use a Bank of Canada harmonized rate for the tax year.

    One not on this however is you should still apply to the US IRS for a Federal Employer Identification Number FEIN – they have a section in Philadelphia that handles providing FEIN to foreign entities. You will need the FEIN to properly complete the W8BEN. When I applied for the FEIN I stated that I would be providing reports electronically to US clients. They sent the FEIN to my Canadian business address.

    If you can find a way to engage US clients without having to set foot in the US (I.e. web design, blogging, authoring etc.) it is a great way to broaden your customer base without needing a US work visa.

  98. Lorraine Johnston says:

    Thanks for this great article.

    I started a sole proprietorship transcription business a few months ago and was advise to apply for HST # which I did.

    Todate, I have not had any sales.

    Q1: Should I still send in my Input Sales Tax even though I have no sales?
    Q2: Can I cancel my HST obligation seeing I’m not making $30K/yr.?

  99. Jeff says:

    Can you back date the registration of your sole prop? is that even needed? ie. does it make a difference?

  100. Shawn says:

    Recently started my own incorporated mechanic business. Only make $ off the labour and have had to use all the $ I’m making to pay my expenses, not enough $ yet to pay myself. An accountant told me to hold back $ each month for hst, CPP and income taxes which I have been. If I don’t pay myself this year do I still have to keep saving CPP and Income Tax money aside each month?

    • wesbos says:

      You should talk to that account to clarify what he said. You should only pay CPP and income tax on salary that you pay yourself so maybe not but don’t take my word for it

  101. I agree about not using H & R Block. Although they seemed to do a good job, I realized I could do the same for about $100 less i.e. $18.02 with u-file vs. $120. I started to work from home last year and have not registered my web business yet. Can I claim the costs incurred to set it up?

  102. David says:

    I have just started my business and have registered as a sole proprietorship. I am wondering, because I have not made any money through my business but still hold a full time job will I have to pay additional tax on my employment income and should I register for my HST number?

  103. Erika says:

    Hello,

    If you are a small hobby business and only doing cash sales does a journal log book count for a receipt? Or just getting a receipt book?

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