Self-Employment Statements

Individuals carrying on a business can no longer take advantage of a tax deferral as a result of using a fiscal period that differs from the calendar year.

Taxpayers have until June 15 of each year to file their tax returns although income tax must be paid by April 30. All unpaid tax as of April 30 will be subject to interest charges. However, no penalties will be charged to taxpayers before the filing due date.

NAICS codes definition

North American Industry Classification System (NAICS) codes are hierarchical numerical codes used by the member countries of the North American Free Trade Agreement to provide common definitions and descriptions of our industries and business activities. The government of Canada as well as the governments of the provinces and territories use the data provided by NAICS codes for economic analysis and fiscal policy responses.

You must indicate the main activity by selecting the applicable North American Industry Classification System (NAICS) code. For more details on business activities related to an NAICS code in the search box list, you can consult the list of definitions on the Internet at the following address: https://www23.statcan.gc.ca/imdb/p3VD.pl?Function=getVD&TVD=1369825

It is crucial that the most accurate business activity is selected the first time since the first year’s code is carried forward to subsequent years.

The taxpayer may elect to change the fiscal period’s year end to December 31. The taxpayer must include the net business income for the fiscal period that ended in the calendar year, but at a date other than December 31, as well as the net business income for the rest of the calendar year to December 31. To report a self-employed income as a result of a conversion to a fiscal year ending on December 31, proceed as follows:

1. In the “Select fiscal period” section of the appropriate form, enter the fiscal year’s start date and end date and select box 3, Fiscal period converted to December 31.
   The program will create another copy of the form immediately after the first; it is the additional form.
2. Complete the first form entering data with respect to the fiscal year ending in the calendar year.
3. Select the next copy, and enter data with respect to the fiscal year ending on December 31.

The results reported in both copies of the form are carried over to the summary for this type of income and the T1 return.  

The taxpayer may elect to keep a fiscal period that differs from the calendar year. The taxpayer must include in the income for the current year, the net business income earned for the fiscal period that ended in the calendar year, but at a date other than December 31, as well as the additional income for the period between the end of this fiscal period and December 31. Where the taxpayer so elects, select box 2 and complete an income and expense statement for the fiscal period ending in the current calendar year. The program will calculate the additional income, which is an estimate of income earned in the remainder of the calendar year is established, based on the income for the fiscal period ending in the calendar year.

When additional income has been included in the previous year's income, this amount must be deducted from the current year's income calculation.

For 2022, a taxpayer that elects to use this method will be taxed on the following amounts:

• Income earned for the fiscal period ended in 2022;
• Plus additional income inclusion for the current taxation year calculated using the following formula: A x B/C, where:
• A = business income earned during the off-calendar fiscal period ending in the calendar year;
• B = the number of days during which the business was carried on after the end of the fiscal period and before the following January 1;
• C = the number of days in the fiscal period ending in the calendar year;
• Minus additional income reported in the prior year.

For a taxpayer who carries on a business as a member of a partnership, the net business income is determined after deducting the total carrying charges and automobile operating expenses that are not deductible by the partnership, but only by the taxpayer.

If the business income includes an amount deemed to be a taxable capital gain, item A of the additional income calculation must be adjusted in order to exclude this amount.

A taxpayer may opt out of the alternative method and elect a December 31 year end. The opposite is not, however, possible.

Both the net income for this fiscal period and the additional income from the previous year are updated to the appropriate summary and from there to the T1 return.

The individual who begins to carry on a business in 2022 may elect to include an "additional estimate income" in 2022 in order to reduce the income on which the individual will be taxed in 2023 (if such planning is profitable) where he/she opts for a 2023 year end. To proceed this way, select box 2, and complete the statement of income and expenses for the period ending in 2023. If the earnings are not known at the time the return is prepared, you must estimate the amount. The program will add to the taxpayer's income for the year, the additional estimate income determined by the business' net income for the period ending in 2022. The estimate income for 2022 equals the net income for the period ending in 2023 multiplied by the number of days in 2022 found in 2022.

Many partnerships are required to file a T5013 Partnership Financial Return and provide T5013 slips to the individual partners. In such cases, the taxpayer's business income may be entered directly in the T5013 screen. However, if the taxpayer wants to claim additional expenses, adjust the income appearing on this slip or calculate income according to the alternative method, the income must be entered in Part B of a statement of income and expenses rather than in the T5013 screen.

Taxprep allows you to transfer self-employment income from boxes 116, 120, 122, 124 or 126 of the T5013 slip to a self-employment statement (T2125, T2121 or T2042) in order to report additional income and/or deduct expenses for the partner. For more information, consult the Help related to the T5013 slip.

If the taxpayer wants to adjust self-employment income shown in the T5013 slip, calculate income based on the alternative method or report additional income, this income must then be reported in Section “Additional income” of the Partner’s Income and Expenses Workchart (Jump Code: PARTNER).

If the taxpayer wants to claim additional expenses, the Partner’s Income and Expenses Workchart can be used to enter the amount of these expenses in detail.

For more information on the Partner’s Income and Expenses Workchart, consult the Help related to this workchart.

Please note that Section “Calculation of your share of the partnership net income (net loss)” of Form T2125, T2042 and T2121 can also be used to enter the partner’s expense amounts, but with less details. This section is calculated only if:

• the percentage representing the percentage of the partnership is entered in the “Identification” section of the self-employment statement; or
• the box The income (or loss) entered in this statement represents 100% of your income (or loss) as a partner is selected in this section.

If the taxpayer carries on a business in partnership with his or her spouse, you can update the relevant information to the spouse's return through coupling. Enter the spouse's percentage interest in the business in section A, "Details of other partners," and indicate that you want the information to be updated through coupling.

If the business income is from a partnership, the expenses for the use of a vehicle for business purposes and the home office expenses will automatically be charged to the portion of the income or the loss that goes to the taxpayer.

Where the partner is the taxpayer's spouse and expenses related to the use of the home as a place of business are claimed, a specific allocation of the area used must be performed based on the respective shares of each spouse.

The amount deductible as expenses related to the use of the home as a place of business cannot exceed the lesser of the following two amounts:

• the sum of any amount carried forward plus the home office expenses incurred in the year;
• the net income before deducting business-use-of-home expenses.

During roll forward, the program will carry forward to the following year, any expenses that could not be claimed in the current year.