The tax system is one that has been in existence since the dawn of time. It is what contributes to a country’s or state’s revenue as the government takes some of that profit a business has worked so hard to make.

Though the system is much more intricate and a hundred times more complex, it’s also mandatory, as it regulates everything that concerns the operations in a country. However, you must know that the way taxes work will differ from one country to another, and it also may differ depending on a business’s size.

Here is what you need to know about how taxes work for small businesses in the Great White North, Canada.

Does a small business have to pay taxes?


The answer is yes. Though unlike large businesses, small ones are considered very lucky as they only get by with a small business tax rate of 9%. The general corporate tax rate stands at 28%, which is definitely much larger.

How do you define a small business in Canada?

To qualify for the small business tax rate in Canada, you have to check a few things off your list of requirements. For starters, you have to be a Canadian-based corporation, which means your base should stand in the lands of Canada.

Second, on the list is that you must have less than 100 employees. So, if you have 101 employees, you will probably be considered part of the big league. Another prerequisite is that you must be making less than $500,000 annually.

Filing for tax returns


It is no secret that as you grow in size it becomes slightly more and more complex to keep track of what is happening. Another thing is that you might have a lot of tedious responsibilities.

According to, oftentimes in accounting and bookkeeping, experienced entrepreneurs and business managers can make pretty simple mistakes that may, unfortunately, lead to some legal issues. Though, unfortunately, traditional accounting firms usually come up short in providing affordable and all-encompassing services to small businesses.

For that reason, it is important that all small entrepreneurs and managers learn to file for tax returns, although not all types of business entities can get a tax refund. Typically, the only type of small business that is eligible for a refund on their tax is a C-corporation.

Other types are rarely eligible for tax returns. If you own a small business, then all you do is enter your tax information, which includes filling out personal identification, calculating your total income, and filling out the business identification of a T2125 form. Use your records to complete the income and expenses, parts of the Statement of Business or Professional Activities Income tax form. Once you are done, just enter your business expenses.

Completing the T1 Income Tax Form

The process of filing for tax returns is a rather lengthy one. It will demand a series of paperwork, signing up with Canada Revenue Agency’s “My Account,” and then finally entering your tax information. Throughout this process, a number of considerations should be made. Here is a breakdown of the process.

Organizing Paperwork


This segment may ask you to use income-tax preparation software. It is a software that can make your life a whole lot easier when it comes to calculating your tax returns!

You can use it to gather and prepare the necessary paperwork, which includes the following:

  • Your business’s tax-ID number
  • Your social insurance number
  • A copy of the CRA’s (Canada Revenue Business) business and professional income guide
  • Your business records

After you get your paperwork sorted, make sure to include the annual total for your business sales, any business expenses, and your profit from your sold goods, as well.

My Account

My Account is an online service provided by the CRA that helps you through the process of requesting your tax returns. If you have not yet signed up, make sure to create an account before you proceed.

This service will allow you to manage your tax information and view your payment history and assessment. It will also grant you the feature of receiving notifications via email. Just head to the CRA’s online webpage and sign up.

Tax Information


When you’re dealing with your tax information in order to fill application forms, there is a very specific process that you should follow to avoid entering any erroneous information. When filling in your tax info, follow these steps:

  1. The first thing you need to do is fill out the section which is labelled “Personal Identification” with the appropriate information. This is where the income-tax preparation software shows its many benefits. The software is easy to use and follow, and it permits you to transfer information from previous years. It will also automate parts of this process, so you don’t have to do it manually.
  2. After filling in your information in the “Personal Identification” section, you will want to calculate your total income. Part of doing so will require you to calculate your business income, while the other part will ask that you fill in a T2125: Statement of Business or Professional Activities form.
  3. This brings us to the T2125 form. You will have to start off by filling in the “Business Identification” section, which will require you to know the Industry Classification Code for your business. This is a 6-digit number.
  4. You are not yet done with the Statement of Business or Professional Activities form, as there is still one more section that needs filling. This will be the “Income and Expenses” section, where you will need to fill in your business records information.

Business Expenses

When you are entering information concerning your expenses, you will have to make some considerations. For instance, you might want to think about filing a claim for motor vehicle expenses, or a claim for capital cost allowance.

You could also skim through the section “Calculation of Business Use of Home Expenses” to see if you have missed anything. However, this part of the form should only concern you if you run a home-based business.

All in all, small businesses might be considered luckier as they profit from the small business tax rate, though they swim in an ocean full of fish and sharks, and they can easily be erased. Having a different tax rate system and by the filing of tax returns, these small businesses are given a fighting chance.