A Complete Guide to Small Business Tax Filing in Canada

Small business tax filing is a sensitive and detail-oriented process that requires a solid understanding of tax regulations—particularly when it comes to an individual’s role in the business. A stakeholder’s status determines their level of responsibility and how they should approach tax filing. For small business owners, tax obligations largely depend on their business structure—whether they are sole proprietors or operate in a partnership.

It is the business owner’s responsibility to file the correct tax forms with the Canada Revenue Agency (CRA) and to apply the appropriate tax rates. To keep the process simple and accurate, it’s essential to declare all business income, deduct eligible expenses, and file taxes properly.

Overview of Small Business Taxes

Goods and Services Tax (GST)

GST is a 5% federal value-added tax applied to most goods and services across Canada. Some provinces—Alberta, Yukon, Northwest Territories, and Nunavut—only charge GST.

Provincial Sales Tax (PST)

PST (also known as Retail Sales Tax) is charged in certain provinces on the sale of taxable goods and services. Rates and rules vary by province. Businesses must collect PST in addition to GST unless the product or service is exempt.

Harmonized Sales Tax (HST)

HST combines GST and PST into a single tax. It applies in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. In these provinces, businesses charge HST instead of separate GST and PST.

Note: British Columbia, Manitoba, Quebec, and Saskatchewan charge PST separately from GST. Some items like groceries, prescription drugs, and healthcare services are exempt from both taxes—but exemptions can differ between GST and PST.

Corporate Tax

The general federal corporate tax rate is 38%, reduced to 28% after the federal tax abatement. Eligible small businesses may qualify for the Small Business Deduction (SBD), which lowers their federal tax rate to 9% on the first $500,000 of active business income.

To qualify for the SBD, a business must be a Canadian-Controlled Private Corporation (CCPC) with less than $15 million in taxable capital employed in Canada.

Your Business Structure Affects How You File Taxes

The way your business is structured plays a key role in how you file your taxes. If you run your business independently, you are typically considered a sole proprietor. Sole proprietors must include their business income on their personal tax return and complete Form T2125, Statement of Business or Professional Activities. In Quebec, the equivalent form is TP-80-V.

If you operate a business in partnership and it is unincorporated, you will still use Form T2125, but you must complete the partnership section of the form.

On the other hand, if your small business is incorporated, it is considered a separate legal entity. In this case, you must file a corporate tax return using Form T2 and file your personal taxes separately.

Incorporating Your Business: Pros and Cons

There are several advantages to incorporating your business. A major benefit is the lower corporate tax rate for small businesses, which can be especially favourable if your personal income is in a higher tax bracket. However, the downside is that corporate tax filing is more complex and typically requires additional financial documentation and the assistance of an accountant.

For unincorporated businesses, any losses can be applied against personal income, reducing your overall taxable income. In contrast, losses incurred by incorporated businesses remain within the corporation and cannot be used to offset personal income.

Take Leela McDowell, for example. She runs a professional artist hiring agency in Toronto. Initially, she operated as an unincorporated business and was able to deduct her business losses from her personal income—keeping things simple. But as her business grew, incorporation became a logical step. She recalls the shift from deducting losses on her personal tax return to paying separate corporate taxes.

What Qualifies as Business Income?

The CRA defines business income as income earned from activities where goods or services are sold for profit, whether in your personal name or in the name of your business. This is distinct from income earned through employment or investment.

Business income includes earnings from professional services, self-employment, and other commercial activities where the intention is to make a profit. It’s important to note that income from employment does not count as business income.

To ensure accuracy, business owners must report all sources of business-related income when filing taxes.

What Counts as Business Expenses?

Understanding what qualifies as a business expense is critical in tax filing. Business expenses are the costs you incur during regular business operations to generate income. These expenses can be deducted from your business income, effectively lowering your taxable earnings and the amount of tax you owe.

The CRA provides detailed guidelines on allowable business expenses. It’s advisable to consult the CRA website or work with a qualified tax professional. While personal costs like groceries or vacations cannot be deducted, home office or vehicle expenses may be, especially if you work from home.

Tax Deadline for Small Business 2025

Self Employed

Payment Deadline: April 30, 2025
Filing Deadline: June 15, 2025

Corporate

Payment Deadline: Pay 2 months after your fiscal year-end
Filing Deadline: File 6 months after your fiscal year-end

Sales Tax Deadlines

Your sales tax filing deadline is based on the reporting period you chose when registering your GST/HST account:

• Monthly: Return and payment are due one month after the end of each reporting period.
• Quarterly: Return and payment are due one month after the quarter ends.
• Annually: Return and payment are due three months after your fiscal year-end.

Other Deadlines:

T4, T4A, and T5 Slips Deadline: Last day of February
RRSP Contribution Deadline: February 28, 2025
TFSA Contribution Deadline: December 31, 2024

Final Steps: Filing Taxes Accurately

With a clear understanding of business income, deductible expenses, and applicable tax forms, you’re ready to complete your tax filing with the CRA. For sole proprietors and unincorporated partnerships, profits from business activities are added to personal income and taxed accordingly. Your overall tax rate will depend on your total income, deductions, and personal circumstances.