# sole proprietorship/partnership tax and personal tax



## joncnca (Jul 12, 2009)

Hi everyone,

If i were to have a sole proprietorship/partnership home side-business (i.e. have a business name and CRA business number), and also have a job, i need to file two separate tax returns, right? one for the business using the business number, and one for my own personal taxes.

if for instance, i were to use one floor of my house for the business or spend money on legitimate business expenses, then on the business tax return i could claim an eligible portion of these expenses on this tax return, right?

my personal tax return would not be affected at all by the home business, with respect to deductions for business expenses. 

however, if i pay myself a salary from the home business, obviously that would count towards my income on my personal tax return? is that the only way to 'receive' money from the business, by paying myself a salary. (cannot pay dividends with a SP/partnership, right? only with corporations?)

my overarching question is, with this kind of setup, i would need to file two separate tax returns, personal and business, right?

in fact, even if i didn't have a job, i would still need to file two tax returns, as i would likely be paying myself from the home business?

trying to get this all straight in my head.

thanks!


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## MoneyGal (Apr 24, 2009)

One return. You don't pay yourself a salary - all income (after deductions) from the SP is taxable in your hands. You use the T2125 to report business income and expenses.


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## mind_business (Sep 24, 2011)

MG is correct, all your income is reported on one return, not two. Your income from the business is simply:

Net business income = Revenue - [Expenses+allowable deductions]. 

Unfortunately, combining your personal and business income on one tax return pushes you into a higher tax bracket (higher marginal tax rate). 

A bit of advice - when you depreciate equipment, software, etc to determine your allowable deduction (CCA or Capital Cost Allowance), make sure you carefully read through the information on the Canada Revenue Agency website. I maintained our books for the business and did the taxes, and the first year was a lot of work understanding all the applicable tax rules. If I had to do it over, I would have an accountant help set up the method of accounting (accrual vs cash), and provide us with a template for keeping our books. Small price to pay unless you're comfortable learning and maintaining it on your own. For me there was a steep learning curve. However once you understand the concepts, it's not that big of a deal. Just need to track your items carefully.

Don't forget your regular PST / GST, or HST submittals (depending on your province).

Last piece of advice, don't mix your personal and business income into the same bank account. Keep them separate. If you want to use some of the money for personal use from your business account, you can simply show it as a transfer out in your books with a notation 'personal use' or something similar. This will not affect your taxes since your income is based on what the business 'makes' in a year, not the amount you draw out of it for your own use.


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## joncnca (Jul 12, 2009)

i see, thanks for the info.

if it is a partnership (e.g. with my wife), i assume we just each report our proportion of the business income (e.g. 50% each) on each of our own tax returns?

if one person is in a higher tax bracket than another, we must still report 50/50 business income (or whatever proportion is in the partnership agreement, right? we can't arbitrarily say that, even though we both own equal stake in the partnership, because one person is in a lower tax bracket from employment income, that person will report more of the business income...can't do this, right?

that's another thing about partnership, when it comes to business expenses, HST submittals (Ontario, and does this not only apply to business with income exceeding $30,000?), do all of these numbers get divided 50/50 (or whatever proportion in the agreement) for tax purposes as well, or can either partner alone include in their taxes?

i would keep a separate business account, credit card, everything for the business. but let's say in the beginning, i take $1000 or something from my personal and want to put it into the business account for start up operating costs....how do i track this in my records? is it considered a gift, and so there're no tax implications...or is it income for the business, or is it a loan...and if it's a loan, do i need to charge interest to the company to avoid attribution rules....er....if the money is used to obtain some return on the investment....am i getting my signals crossed here?

thanks!


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## mind_business (Sep 24, 2011)

I'll let someone else respond to your partnership / split of income and HST filings. I only have experience with a sole proprietorship - single business owner.

Regarding your start-up PERSONAL LOAN, we had to do the same thing with my wife's business. We simply registered the transfer of money from our personal account to her business account as a 0% Personal Loan. Keeps it relatively simple, and doesn't affect your taxes. When you're ready to reimburse yourself the $1000, show it as a payment towards your Personal Loan.

If you don't register it as a loan, and don't have a clear paper trail showing that it came from your own personal account, it can be misconstrued as revenue. Keep things clear and simple.


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## joncnca (Jul 12, 2009)

by "register as a loan" do you simply mean, keep records of the transfer, indicate in the bookkeeping that it is a loan for the business....or is there something specific that you need to 'register' with the bank or some other regulating body?


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## mind_business (Sep 24, 2011)

I just mean 'record' the transaction in your books as a 0% interest Personal Loan.


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## MoneyGal (Apr 24, 2009)

Jon - in your case it would probably be WELL worth it to spend $250 or so and meet with an accountant to set up your books. Especially if you want to establish a partnership agreement which deviates from 50/50 ownership...you have a lot of questions, there are a lot of implications from the questions, and I think you will be happier if you get them answered all at one go.


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## stardancer (Apr 26, 2009)

joncnca said:


> i see, thanks for the info.
> 
> if it is a partnership (e.g. with my wife), i assume we just each report our proportion of the business income (e.g. 50% each) on each of our own tax returns?
> *On the T2125, you report the whole thing, then down further the net income gets divided into whatever split you have. Both of you must submit a T2125 with your tax returns*
> ...


Hope this helps


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> Jon - in your case it would probably be WELL worth it to spend $250 or so and meet with an accountant to set up your books. Especially if you want to establish a partnership agreement which deviates from 50/50 ownership...you have a lot of questions, there are a lot of implications from the questions, and I think you will be happier if you get them answered all at one go.


Exactly - get an accountant please. Well worth the money.

If you are keen enough, you can do it yourself after the first year once you learn what to do.

It's not expensive at all.


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## joncnca (Jul 12, 2009)

thanks for the advice everyone, i do intend on getting this done initially by an accountant with whom i'm acquainted. i'm sure it's not that expensive, and it would be worthwhile.

but i like to learn and understand these things for myself too. thanks stardancer for drawing my attention to the T2125, it's pointed me in an educational direction. i'd read about some of those issues about HST, and i'll see what other issues come up.

anything glaring that i should be aware of in this type of partnership, that anyone has looked back and thought "i wish i knew ........ back when i was doing this"?


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## Young&Ambitious (Aug 11, 2010)

I would recommend a less-defined partnership agreement. For example, you don't need to say every year will be a 50%/50% split; your agreement can be based on hours worked each year and thus it'll vary from year to year.


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## joncnca (Jul 12, 2009)

Young&Ambitious said:


> I would recommend a less-defined partnership agreement. For example, you don't need to say every year will be a 50%/50% split; your agreement can be based on hours worked each year and thus it'll vary from year to year.


this seems to be ad odds with what stardancer said about not being able to change the split from year to year. any reference?

thanks


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## MoneyGal (Apr 24, 2009)

Young&Ambitious said:


> I would recommend a less-defined partnership agreement. For example, you don't need to say every year will be a 50%/50% split; your agreement can be based on hours worked each year and thus it'll vary from year to year.


This is a strange post. I am only really familiar with the Partnership Act in Ontario, but I believe the same holds true in other provinces as well - in the absence of a specific partnership agreement, profits are split equally by the partners each year (see 24.1 of the Ontario Partnerships Act). 

So if you wanted to vary the profit-splitting, you would not need a "less defined" partnership agreement - you would in fact need a MORE defined partnership agreement, one which specifically varies from the default provisions of the act.


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## Homerhomer (Oct 18, 2010)

In theory you could start your own business without partnership with your spouse and have your spouse charge you fee based on work done, this way it will be much more flexible from one year to another. You would report the revenues and expenses (including fee charged by the other spouse), and the spouse will report revenues which equal the fee on her return and no expenses. You may need to get two gst accounts depending on revenues level.


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## joncnca (Jul 12, 2009)

Homerhomer said:


> In theory you could start your own business without partnership with your spouse and have your spouse charge you fee based on work done, this way it will be much more flexible from one year to another. You would report the revenues and expenses (including fee charged by the other spouse), and the spouse will report revenues which equal the fee on her return and no expenses. You may need to get two gst accounts depending on revenues level.


i'm thinking then in this situation, we would both basically be running sole proprietorships independent of one another, and simply charging one another for services, as you say, needing 2 gst accounts.


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## Young&Ambitious (Aug 11, 2010)

MG you are correct, in the abscence of an agreement, the split would be 50/50. However, the partners could draw up an agreement wherein they state the split can be based on a different arrangement. There can be a fixed and variable component (eg. $2000 to A, $1,000 to B and 50%/50% funds in excess of etc). People can make it as complex as they would like


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