When it comes to business operations, there are many individuals who abide by the rule of ‘ if you want something done right, do it yourself.’ That’s why in numerous industries across the Canadian market landscape, there are sole proprietorships.
When it comes to how these enterprises function in the great white north, there are a few details that merit some examination. Especially, if you are an individual considering carving out your own path in the Canadian market landscape. These details can include matters surrounding estimated tax payments and how your personal income tax rate functions alongside your sole proprietorship tax rate.
While these matters may seem overwhelming, you’re in luck, as the Canadian government has laid out the basic steps required to secure a ‘Business Number’ or ‘BN’.
However, as Canada has an economy almost as big as its landmass, there are some particularities that impact different jurisdictions across the country when it comes to the registry and attainment of Business Numbers.
In this report, we’ll take a look at the fundamentals of what a Business Number is in Canada, the process of attaining one and if sole proprietor business operators need one.
What is a Canadian Business Number?
In the Canadian market system, every business number is unique. BN’s register as a nine-digit identifier that is distributed by the Canada Revenue Agency (CRA) to businesses and organizations across the country. BN’s are applied to track and identify businesses and are an essential component of registration and taxation protocol in Canada. These numbers help identify your business and help you manage estimated tax payments for your business. If you’re a sole proprietor they also layout your sole proprietorship tax rate as well, making them absolutely crucial for compliance regulations.
If you are considering obtaining a business number in Canada, here are a few things you may need to keep in mind when looking into the process.
Unique Identifier: The business number functions as a specialized identifier for each documented business entity in Canada. It is used by federal, provincial and territorial government agencies to track business activities and operations and pay taxes.
Features of BNs: A business number is made up of nine digits, including a unique identifier for the business and its associated programs. Additionally, there is a reference number specific to the program under which the business is registered.
Canada Revenue Agency: The CRA is the government agency responsible for handing out business numbers and managing affairs associated with them. Businesses typically obtain their BN from the CRA when they register for tax-related accounts. This includes the Goods and Services Tax and Harmonized Sales Tax, depending on the province of operation.
Registration for Tax Accounts: To get a business number, a business owner or representative must register for the specific tax accounts relevant to their operations. For example: To collect and remit GST/HST, a business registers for a GST/HST account, and a Business Number is assigned for this purpose.
Provincial and Territorial Programs: In addition to federal tax accounts, the business number can also be used for certain provincial or territorial programs. Businesses may receive a reference number specific to their jurisdiction in these cases.
Businesses and Organizations: The business number is not limited to for-profit businesses. In many instances across Canada, non-profit organizations, charities, and government entities can also receive a business number for administrative and tax purposes.
Changing the Business Number: If there are changes to a business's structure, ownership, or registration details, the business number may need to be updated accordingly. This can typically be done through the CRA's online services or by contacting them directly.
Privacy and Security: business numbers are confidential to the holder and should be protected like any liable business information. They are used for official government communications and transactions and must be protected in order to do so.
Verification and Authentication: Businesses and government agencies may use the Business Number to verify a company's status and confirm its registration with the CRA. This applies to all holders of a BN, not just for-profit organizations.
The business number is a crucial regulatory instrument of Canadian organizations, facilitating interactions between businesses and government agencies, particularly for taxation and regulatory purposes. Business owners should ensure that they use their BN correctly when filing taxes, completing government forms and conducting other official business-related activities.
Do I Need a Business Number as a Sole Proprietor?
Now that we’ve covered the basic building blocks of business numbers in Canada, we can move on to the finer details of this report. Specifically, the nature of the business number registry in Canada and how it correlates to self-employed individuals and sole proprietors.
In Canada, whether you need a business number as a sole proprietor depends on a handful of variables. These include the nature of your business activities and whether you meet specific registration thresholds.
Here’s a framework to help you determine if you need a BN as a sole proprietor or self-employed individual.
Goods and Services Tax (GST)/Harmonized Sales Tax (HST): If your total worldwide taxable sales, including those of your sole proprietorship, exceed or are expected to exceed $30,000 in a calendar year, you are generally required to register for a GST/HST account. Once you register for GST/HST, you will be assigned a Business Number to report the sole proprietorship's income and pay sales taxes accordingly.
Other Tax Accounts: If you plan to hire secondary employees and deduct income tax, Canada Pension Plan (CPP), or Employment Insurance (EI) contributions, you will likely require a BN for payroll purposes.
Import/Export: If you engage in import or export activities, you may also require a BN to participate in the Canada Border Services Agency's (CBSA) import/export programs.
Sole Proprietorship and Incorporated Business: If you operate your business as a sole proprietorship — a non-incorporated business — you may use your Canadian Social Insurance Number (SIN) for business and tax-related purposes, instead of a separate BN to pay income tax. Keeping this in mind, this only applies if you do not meet the registration thresholds for GST/HST or payroll deductions.
Voluntary Registration: If you don’t meet the registration requirements mentioned above, you can voluntarily register for a GST/HST or payroll deductions account and obtain a BN.
Registration Process: To register for a BN or any associated tax accounts, you can typically do so through the Canada Revenue Agency's (CRA) online services, by mail, or by contacting the CRA directly. The registration process will require you to provide information about your business, including its legal structure and anticipated activities.
Before engaging in the Business Number process in Canada, it is always vital to consult a legal expert. An Employer of Record (EOR) can function as one of these expert bodies. EORs can facilitate the responsibilities of a legal entity, while also providing compliance advice on regional tax laws and registration. Regulatory and legal professionals can help you juggle your estimated tax payments as a sole proprietor.
Reporting Income as a Sole Proprietor in Canada
When it comes to reporting income as a sole proprietor in Canada, the majority of legal and regulatory responsibility falls upon the individual. When engaging in income reports as a self-employed individual, there are a few crucial steps you’ll have to take to make sure you are not at risk of non-compliance.
These steps include keeping up-to-date financial records, the preparation of financial statements and filing accurate tax returns. However, since the bulk of reporting duties falls upon the sole proprietor, one needs to make sure all aspects of financial reporting are air-tight. This way you ensure not only compliance but also, manage your personal income tax rates alongside them.
Keep Records
Maintain detailed and organized records of all your business income and expenses throughout the fiscal year. This includes any sales receipts, invoices, bank statements and receipts for business-related purchases including any business loans you may have acquired in your sole proprietorship process.
Choose a Fiscal Year-End
As a sole proprietor, you can choose a fiscal year-end date for your business. Many sole proprietors use December 31st as their fiscal year-end solely because it aligns with the calendar year and is easier to manage from an administrative standpoint.
Prepare Statements
Once your fiscal year concludes, prepare financial statements for your business. These often include an income statement — generally profit and loss — and a balance sheet. Financial software or accounting software can help with this, or services provided by third-party services, like an Employer of Record.
Calculate Net Income
Determine your business's net income by subtracting total expenses from total revenue. Net income is the amount that will be subject to income tax.
Report Business Income
On your personal income tax return — referred to as a T1 in Canada — report your business income on the appropriate lines. Include your net income from your sole proprietorship, as well as any other sources of income.
Deductions and Expenses
Deduct business expenses from your income if you wish to reduce your taxable income. Common deductions include rent, utilities and business use of your home. Keep receipts and documentation to support your deductions as you will need to supply this paperwork yourself.
Capital Cost Allowance (CCA)
If you have depreciable assets, such as equipment or vehicles, you can claim Capital Cost Allowance (CCA) to account for their depreciation over time. This can also reduce your taxable income.
Self-Employment Tax
As a sole proprietor, you are responsible for paying both the employee and employer portions of the Canada Pension Plan (CPP) and Employment Insurance (EI) premiums. Calculate and remit these amounts separately from your income tax.
File Your Tax Return
Complete and file your personal income tax return, including the sections related to self-employment income. You can file online using tax software or by mailing a paper return.
Income Tax Deadlines
Be aware of tax filing deadlines. Generally, personal income tax returns for the previous calendar year are due by April 30th. However, if you or your spouse or common-law partner is self-employed, the deadline is extended to June 15th. Keep in mind that any taxes owed are still due by April 30th in Canada. These deadlines apply to sole proprietorship taxes as well, as there are no tax exclusions for this form of business operation.
Installment Payments
If your business generates significant income, you may be required to make quarterly installment payments of your estimated taxes throughout the year. This prevents large tax bills at tax-filing time.
Keep Records for Several Years
Retain your business records and tax-related documents for at least six years, as the CRA may audit your tax return within this timeframe.
As a self-employed business operator, and the sole proprietor of said enterprise, it is your duty to ensure that all of the above steps are completed in coordination with standardized regulatory compliance laws of Canada.
Details of Sole Proprietorship Regulations in Canada
When it comes to the legal requirements of the self-employed in Canada, as thoroughly mentioned in this report, the bulk of compliance monitoring falls to federal regulators in Canada. However, certain provinces/territories may have certain requirements when it comes to setting up an operation as a sole proprietor.
Take Quebec for example. If you’re looking to register a business in Quebec as a sole proprietor, when it comes to classification, both the proprietor and the business itself are the same entity in the eyes of the provincial government. As for Ontario, Canada’s most densely populated province, when looking to register a sole proprietorship in the province, you may need a few more specifics when registering. These can include credit card details, an email address for the business and additional certification if you deal with certain materials.
How an Employer of Record can help
When it comes to how to manage all of the reviewed variables surrounding sole proprietorship in Canada, there is one ideal solution to help you juggle all of the regulatory ins and outs.
Employers of Record — like Borderless — can be valuable partners for self-employed individuals in Canada, offering a bridge between the independence of self-employment and the administrative complexities of compliance.
Employers of Record can take on the responsibility of payroll, tax withholdings, benefits and other regulatory requirements. This will, in turn, allow sole proprietors the time to focus on their core business activities.
By partnering with Borderless, self-employed professionals can enjoy the benefits of a streamlined business experience while maintaining the flexibility and independence that come with sole proprietorship. This relationship not only simplifies administrative burdens but also provides the proprietor peace of mind, ensuring that all legal and financial obligations are met while aiding the pursuit of business endeavors.
Contact our team today to learn how we monitor the changing landscape of Canadian commerce and see how Borderless can help you as a sole proprietor operating in Canada or remotely.
