Area of Law: Tax Law
Answer # 190
Sole proprietorshipsRegion: Ontario Answer # 190
A sole proprietorship is an unincorporated business that is owned by one person. Sole proprietorships are treated differently from other types of businesses for tax purposes.
Net business income from a sole proprietorship must be included as part of the sole proprietor’s personal income. However, if the business suffered a loss, the owner can deduct the loss from other income he or she has received for that year. This will lower the overall taxable income of the owner and reduce the amount of personal income tax that must be paid. If the business made a profit, the profits are taxed at the owner’s personal income tax rate. In general, it is better from a tax standpoint to be a sole proprietor if you expect the business to lose money in its early years and you have income from another source, such as employment income.
Further, sole proprietors are required to keep their personal financial records separate from the business records.
You may be eligible to apply to use a fiscal period other than a calendar year for calculating and paying taxes, but you will not usually be able to defer taxes this way. Also, sole proprietors are required to pay personal income tax on net business income earned during the calendar year, even if you do not receive some of the revenue until the next calendar year.
As a sole proprietor you may also be required to collect and remit other types of tax. The most common are HST and payroll tax.
For general information, contact Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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