Income Tax

Complying with the Income Tax Act

Income Tax is an important consideration for every entrepreneur to understand. The difference between understanding and complying with the Income Tax Act as a small business owner or not could put your business in jeopardy. While the information contained herein is an excellent starting point, we advise that you seek the advice of an accountant and lawyer for a professional perspective.

The Income Tax Act is administered by the Taxation branch of Canada Revenue Agency. If you conduct business as a proprietorship or a partnership, you must report your share of gross and net profits (or losses) for the business' fiscal period on your individual tax return (T1).

For an incorporated company, file a corporation tax return (T2) within six months of the end of the corporation's fiscal period.

Reasonable Expectation of Profit

If your business is operating under a sole proprietorship or a partnership, it is subjected to a test of reasonable expectation of profit (REOP) review. A REOP review involves examining the various factors of your business to determine if there exists a reasonable expectation of profit, and thus the existence of a business, for income tax purposes.

While this is not a complete list, some of the factors that the Canada Revenue Agency has used to evaluate REOP are:

• Profit and Loss experience in past years
• Significance and growth of gross revenues
• Development of the operation to date
• Planned or intended course of action
• Time spent on the activity in question
• Education, background and experience
• Extent of activity in relation to that of businesses of a comparable size

If your business is determined to have no REOP, it will be deemed to be not a business for income tax purposes. As such, any expenses and associated losses of the activity will be disallowed. To learn more information, check out the Canada Revenue Agency website.