A sole proprietor pays income tax by reporting income or loss on his/her T1 income tax and benefit return. You have to file a T1 return if you:
- Have to pay tax for the year;
- Disposed of a capital property or had a taxable capital gain in the year;
- Have to make Canada Pension Plan or Quebec Pension Plan payments on self-employed earnings or pensionable earnings for the year;
- Want access to employment insurance benefits for self-employed individuals;
- Receive a demand from the CRA to file a return;
- Claiming an income tax refund, a refundable tax credit, a GST/ HST credit or the Canada child tax benefit.
Instead of the partnership itself paying income tax and filing a return, each partner includes a share of the partnership income or loss on a personal, corporation or trust income tax return. Each partner also has to file financial statements or any of the template forms from the CRA.
In addition to this, a partnership that carries on a business in Canada or a Canadian partnership with Canadian or foreign operations or investments must file Form T5013, Statement of Partnership Income for each of the fiscal periods of the partnership where:
- the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million or has more than $5 million in assets or
- at any time during the fiscal period:
- the partnership is a tiered partnership (has another partnership as a partner or is itself a partner in another partnership);
- the partnership has a corporation or a trust as a partner;
- the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or
- the minister of National Revenue asked in writing for a completed Form T5013.
A corporation has to file a T2 corporation income tax return no later than six months after the end of every tax year, even if it does not owe tax. Financial statements and the necessary schedules must also be attached with the return.
Source: CRA, RC4070 Information for Canadian Small Businesses: http://www.cra-arc.gc.ca/E/pub/tg/rc4070/rc4070-e.html