Reporting differences while being a sole proprietorship versus a regular T4 job
If anyone has recently started a business, you might have heard that you will need to report different for your tax return for the coming year. That is true because in the past, the Canada Revenue Agency (CRA) will receive your T4 by February 28th-29th if your employer is not late to file the T4. That means, the government will already know what you made and how much taxes you are expected to pay from the prior tax year. This is the whole situation when you work a regular T4 job as an employee so what happens when you are a sole proprietor?
Well let me tell you, there are extra complication that will occur on your tax return. But complication does not always mean it is a bad thing. In fact, I want to say that it allows flexibility and ways to report different. In the past, most regular employees do not gain access to reduce their employment income through expenses (ex. you cannot deduct your auto expenses for driving to work). Most of the time if you report employment expenses, you might be heavily subjected to an audit and there are additional steps that need to take place including your employer sending you a T2200 Declaration of conditions of employment. However, when you are a sole proprietor you can skip this step completely and report expenses that occur in your company within a reasonable amount. I say reasonable because it is all subjective based on your revenue levels and the industry you operate under. This also means that the government will not have a clear picture of how much revenue you made during the year without conducting an investigative audit on your bank statements and other financial data as your work does not produce a T4.
Pros of reporting as a sole proprietorship:
Flexibility with reporting as you can claim more expenses
Due date is expended to June 15th rather than April 30th (however, if you owe taxes, you still need to pay it before April 30th.)
Cons of reporting as a sole proprietorship
It is more costly and timely to do. It will usually require an accountant’s service to help make sure it is compliant with CRA regulations and that you are not being overly ‘aggressive’ at claiming your expenses. However, the client can also identify potential expenses you can claim that may not have been included without the accountant’s service.
In conclusion, there are difference to understand when reporting as a sole proprietorship rather than as a regular T4 job and understanding the process and what needs to be done is important to ensuring your returns are done correctly.