Small businesses and self-employed income

The information on this page is for:

  • sole proprietorships
  • partnerships
  • self-employed individuals, including those earning income from commissions

If you are incorporated, this information does not apply to you. Instead, see the information at Corporations.

If you are starting a small business, see the Checklist for new small businesses. The checklist provides important tax information.

What's new for small businesses and self-employed.

Business income includes money you earn from a:

  • profession
  • trade
  • manufacture or
  • undertaking of any kind, an adventure or concern in the nature of trade, or any other activity you carry on for profit and there is evidence to support that intention.

For example, income from a service business is business income. However, business income does not include employment income, such as wages or salaries received from an employer.

Note

You have to report all amounts of income that are required for calculating income for tax purposes. If you do not report all your income, you may be subject to a penalty of 10% of the amount of income that you did not report. For more information, see Business Income Tax Reporting.

Other topics on this page:

Bringing in assets

Determine the fair market value of transferred assets, and the implications of acquiring an existing business.

Fair market value for your assets

You might transfer to your business assets that belong to you personally. If you are operating a sole proprietorship, this is a reasonably simple process. The Income Tax Act requires that you transfer these assets to the business at their fair market value (FMV). This means that we consider you to have sold the assets at a price equal to their FMV at that time.

If this amount is greater than your original purchase price, you must report the difference as a capital gain on your income tax and benefit return. Your business will show a purchase of these assets, with a cost equal to the FMV at the time of the transfer. This is the value that you will add to the capital cost allowance (CCA) schedule for income tax purposes.

For income tax purposes, when you transfer the property to a Canadian partnership or a Canadian corporation, you can transfer the property for an elected amount. This amount may be different from the FMV, as long as you meet certain conditions. The elected amount then becomes your proceeds for the property transferred, as well as the cost of the property to the corporation or partnership.

The rules regarding these transfers of property are technical. They allow you to change your business type from a sole proprietorship to a corporation or partnership or from partnership to a corporation, on a tax-free basis. For more information, see Interpretation Bulletin IT-291, Transfer of Property to a Corporation Under Subsection 85(1), Information Circular IC76-19R3, Transfer of Property to a Corporation Under Section 85, and Interpretation Bulletin IT-413R, Election by members of a partnership under subsection 97(2).

For GST/HST purposes, you may be able to claim an ITC for the GST/HST paid or payable on property such as capital property and inventory, that you have on hand on the day you register. For more information, go to Input tax credits and see Guide RC4022, General Information for GST/HST Registrants.

Buying an existing business

When you are considering becoming a business owner, you have the option of buying an existing business or starting a new one. The option you choose will have a significant effect on how you will account for the purchase of the business assets for income tax purposes.

When you buy a business, you generally pay a set amount for the entire business. In some cases, the sale agreement sets out a price for each asset, a value for the inventory of the business and, if applicable, an amount that you can attribute to goodwill.

If the individual asset prices are set out in the sale agreement, and the prices are reasonable, then you should use these prices to claim capital cost allowance (CCA). If the individual asset prices are not set out in the contract, you have to determine how much of the purchase price you should attribute to each asset, how much to inventory, and how much, if any, to goodwill. These amounts should coincide with the amounts the vendor determined when reporting the sale.

The amount you allocate to each asset should be its fair market value (FMV). You should allocate to goodwill the balance of the purchase price that remains after you allocate the FMV to each asset and to inventory.

Example

You buy a business for $480,000.

The total of the FMV of the net identifiable assets of the business is as follows:

Accounts receivable $80,000 + inventory $40,000 + land $120,000 + building $200,000 = total net identifiable assets $440,000

The value of the goodwill is determined by subtracting from the purchase price the net identifiable assets as follows:

Purchase price $480,000 - net identifiable assets $440,000 =  amount attributed to goodwill $40,000.

Once you have determined the values for the assets and the goodwill, add the fixed assets (such as buildings and equipment) into the appropriate classes for the purpose of claiming the capital cost allowance (CCA). The goodwill is considered to be an eligible capital expenditure, which is treated in a manner similar to assets eligible for CCA.

Treat the value of the inventory as a purchase of goods for resale, and include it in the calculation of cost of goods sold in your income statement at the end of the year.

GST/HST when you buy a business

For GST/HST purposes, if you buy a business or part of a business and acquire all or substantially all (at least 90%) of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST/HST payable on the sale by completing Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You cannot use this election if the seller is a registrant and you are not a registrant. In addition, you must buy all or substantially all of the property, not only individual assets.

For the election to apply to the sale, you have to be able to continue to operate the business with the property acquired under the sale agreement. You have to file Form GST44 on or before the day you have to file the GST/HST return for the first reporting period in which you would have otherwise had to pay GST/HST on the purchase.

Even when you use the election, GST/HST will still apply to a taxable supply of a service made by the seller; a taxable supply of property made by way of lease, licence, or similar arrangement; and, if the buyer is not a registrant, a taxable sale of real property.

Shares of a corporation

Another way of buying an existing business is to buy the shares of a corporation. This does not affect the cost base of the assets of the business. As explained previously, a corporation is a separate legal entity and can own property in its own name. A change in the ownership of the shares will not affect the tax values of the assets the corporation owns. Generally, the purchase of shares of a corporation is not subject to GST/HST.

For more information on changes to your business, go to Changes to your business.

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