When you run your own business as a sole proprietorship, you must fill in two special tax forms when submitting you income tax return. The Canada Revenue Agency’s form T2125 and Revenu Qubebec’s form tp-80.
The best place to start are the excellent PDF guides offered by the CRA and Revenu Québec: Canada Guide, Quebec Guide.
Gross income = Sales – Cost of goods sold
Where cost of goods includes: Opening inventory (raw materials, goods in process, finished goods), Net purchases (not including the cost of merchandise for personal use), Subcontracting costs, Direct labour costs, and Other costs.
Next, you can add up all the Expenses relating to your business activities:
- Advertising
- Meal and entertainment expenses (1.25%-2% of sales).
- Bad debts
- Insurance premiums
- Interest
- Business taxes and licences
- Office expenses. (Not including home-office expenses below)
- Supplies
- Legal fees
- Management and administration fees
- Rent
- Maintenance and repairs
- Salaries or wages, benefits and employer contributions.
- Property taxes
- Travel expenses, other than motor-vehicle expenses
- Telephone, electricity, heating and water
- Fuel and oil
- Delivery, freight and messenger services
- Motor-vehicle expenses, excluding capital cost allowance.
- Deduction respecting incorporeal capital property
- Capital cost allowance.
- Terminal loss.
- Other expenses
Additionally, if you work from home, you can claim Home office expenses:
- Heating
- Electricity
- Insurance
- Maintenance costs
- Mortgage interest
- Property taxes
- Other expenses (e.g. rent)
You’re allowed to claim some percentage $r, 0 \leq r < 1$ of all these amounts proportional ratio of your home that you use for business purpose. Usually $r=0.5$, but it could be more or less depending on how many rooms you use and whether you meet with customers at home.
