Reporting Income And Expenses For Small Canadian Businesses

If you own a business or are self-employed in Canada, you are required by the Canada Revenue Agency (CRA) to report your income from your business in each fiscal year. The fiscal year is normally 12 months beginning on January 1 and ending on December 31 of each year (or your corporate fiscal year if you’re incorporated). You report your income to calculate how much tax you are required to remit to the Canadian government. Failure to do so, may result in interest and/or penalties.

How do I report my self-employment income? There are two methods- The cash method and the accrual method.

Which method applies to my business? You have a choice between reporting your income using cash or accrual method if you are a farmer, fisherman, or self-employed commission agent, but any other self-employment income is required to be reported using the accrual method.

What is cash vs accrual method of reporting income? How are they different?

The difference lies in the TIMING of when cash is received (for your revenue or sales) and paid (for your expenses).

The Cash Method is applied by reporting income and expenses in the fiscal year when you receive and pay them, respectively.

The Accrual Method, on the other hand, does not consider the timing of cash. Instead, you report income when you earn them and report expenses when you incur them.

I am a bit confused, can you give an illustration?

To illustrate, please refer to the table below for sample transactions and how they are reported on both methods:

In summary, you will notice that the total Reportable Income for these transactions are both $700; however, in the cash basis method, you report $500 income in 2021 and $200 in 2022, whereas in the accrual basis method, you report all $700 income only in 2021.

Information is available on the CRA website if you want to read more.

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