Method of Accounting

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As a rule, you must use the accrual method of accounting to calculate your net business income. With this method, you must:

  • report your income for the fiscal period in which it was earned, regardless of whether it was actually paid to you during that period; and
  • deduct your expenses for the fiscal period in which they were incurred, regardless of whether you actually paid them during that period.

Self-employed persons

If you are a self-employed person who receives commissions, you can choose to use the cash method of accounting rather than the accrual method. In such a case, you must:

  • report your income for the fiscal period in which you received it; and
  • deduct your expenses for the fiscal period in which you paid them.

Professions

If you practise a profession, your total income (professional fees) for your first year of operation is the total of:

  • all amounts received during the year for professional services that you rendered during the year (or will render after the end of the year); and
  • all amounts receivable at the end of the year for services that you rendered during the year.

For subsequent years, you must subtract all amounts that were owing to you at the end of the preceding year from the result.

If your income includes an amount received during the current year for services to be rendered after the end of the year, you can deduct a reasonable amount as a reserve for these services.

Partnerships

If you are a member of a partnership, you must report an amount equal to your share of the partnership's income, even if it has not been paid to you or credited to your capital account.

The partnership's gross income for income tax purposes must be identical to the amount shown on its financial statements. Net income may differ, however, particularly where a given type of income or expense is treated differently for accounting purposes than it is for income tax purposes, as in the case of:

  • expenses relating to an office in a partner's home;
  • entertainment expenses;
  • charitable donations;
  • the cost of products intended for sale but consumed by a partner or by members of the partner's family; and
  • expenses relating to the use of an automobile.

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