Why Do Small Business Owners Need NAICS Code?

By doing business in North America, you contribute directly to the economy. Canada offers many benefits and incentives to promote small business owners, especially farmers, fishery, and scientific research. How does the government know which business you do? It has converted the business description into codes, making it convenient to reach every player in the industry in one go. The system is popularly called “The North American Industry Classification System” or NAICS. The system classifies every business from a small startup to a large corporation based on its industry.

Why Do Businesses Need a NAICS Code?

As a business, you must interact with the government on various fronts, and that is possible through NAICS.

• The first time you need a NAICS code is when you go to register your business.
• Then, you need your NAICS code to file corporate income tax. The government identifies the nature of your business through this code. If your code is updated, you can avail of the many tax benefits the CRA has introduced for that specific industry. For instance, the agriculture business has the advantage of reporting its accounts on a cash basis of accounting.
• The government also introduces various grants and incentives for specific industries that businesses can avail of by updating their NAICS code in government records.
• If you are bidding for government contracts, the NAICS code is necessary.
• Qualifying for business loans needs the code.

How Does NAICS Work?

NAICS is a series of six-digit industry codes that uses the top-down approach to identify a company’s primary business activity. In Canada, NAICS consists of 20 sectors, 99 subsectors, 323 industry groups, 694 industries and 923 Canadian industries.

It updates the list every five years to include new industries and unique codes to keep up with the evolving business. The last update was in 2020, when it added Cryptocurrency trading, DoorDash delivery drivers, Instacart grocery shoppers, Commission sales, Cleaning services, and Personal trainers to its list. The next update will happen in 2027.

The six-digit NAICS code denotes the following:

• The first two digits identify the economic sector (23 = Construction)
• The third digit identifies the sub-sector (8 = Specialty Trade Contractors)
• The fourth digit identifies the industry group (3 = establishments primarily engaged in Building Finishing)
• The fifth digit identifies industry (2 = Painting and Wall Covering Contractors)
• The sixth digit identifies national industry (0 indicates no national industry is needed)

The business in our example has an NAICS code of 238320.

How To Choose an NAICS Code?

Nobody knows your business better than you. You can find the list of NAICS codes on the CRA’s website under Industry Classification. Open the latest version, select the economic sector, and keep clicking on the drop-down to see if your business description matches any of the sub-segments.

Many companies may have only three-or-four-digit NAICS codes as their business niche is unavailable on the list. They should check the NAICS updates to see if their niche appears on the list. If unsure, you can ask a professional accountant to help you find the correct NAICS code for your business. A company doing multiple businesses can add multiple NAICS codes that apply to each business.

Do You Need to Update the NAICS Code?

The most common query many business owners have is if they need to update their NAICS code. If you are doing the same business and have not ventured into another, you need not update your NAICS code. However, if you do not have a six-digit code, you may want to check for code updates if your niche sub-sector is added. You can update your NAICS code by adding further digits if it is added.

You can add a new NAICS code to your tax filing and business registration if you expand into a new business under the same company name.

Contact DNTW Toronto LLP to Help You with Business Registration

You can ask a professional accountant to help you identify the right NAICS code. This will open the door for tax benefits and federal grants available to that industry. At DNTW Toronto LLP, our accountants can provide business registration and tax filing services. To learn more about how DNTW Toronto LLP can provide you with the best accounting expertise, contact us online or by telephone at 416.924.4900.