People who are self-employed can generally take advantage of a wider range of available deductions in computing their taxable income than people who earn employment income.
One of the benefits of being self-employed is that you are not required pay Employment Insurance (EI) premiums. This could have saved you up to $955 in EI premiums in 2016 ($836 in 2017). However, this means that if your consulting contracts terminate and you are left without work, you cannot claim EI benefits.
Canada Pension Plan (CPP) contributions are still required. As well, if you are self-employed, you will need to pay the "employer’s portion" as well as your own share. The maximum amount for the combined contribution was $5,089 for 2016 ($5,128 for 2017). You will, however, be able to claim a deduction in computing your income for the employer's portion of CPP up to the maximum of $2,544 for 2016 ($2,564 for 2017), and a tax credit for your own share of the CPP ($2,544 for 2016 and $2,564 for 2017).
The distinction between an employee and an independent contractor is not always clear and is a question of fact. The factors that must be considered in making this distinction are
Accordingly, you will more likely be considered an independent contractor carrying on your own business as a proprietor if you:
If your worldwide taxable supplies of goods and services exceed $30,000 in a single calendar quarter or in four consecutive calendar quarters, you will be required to register for the Goods & Services Tax (GST) and charge GST/HST to your clients. In addition, if in the ordinary course of business you sell or lease taxable goods, or provide software or taxable services, you may need to register for and collect Provincial Sales Tax.
Each case will depend on its facts. Keep in mind that there are other pros and cons of being employed versus self-employed. Consult the advice of a Chartered Professional Accountant.
The general deadline for filing personal income tax returns and paying any taxes owing is April 30th of the following year.
However, if you are self-employed, the filing deadline for you (and your spouse or common-law partner) is extended to June15th of the following year.
If you are a non-resident of Canada filing a non-resident tax return in respect of rents received in Canada, the filing deadline is June 30th where a Form NR6 was filed, otherwise the return is due within 2 years from the end of the year in which the rental income is received.
Just remember, any taxes you owe are still due by April 30th, so make sure you pay your taxes by that date to avoid arrears interest charges. If you owe taxes and your return is filed late, you will be assessed a penalty and interest on the unpaid balance of tax due.
If you find the deadline is fast approaching and you still haven’t received receipts or information slips for some items, file your return anyway with a cheque for the estimated tax owing and an explanation. You are responsible for making any necessary adjustment to your tax return promptly when the documents become available. Failure to do so might result in additional penalties for filing your tax return with incomplete and incorrect information.
The Income Tax Act requires every taxpayer carrying on a business to keep records and books of account so that the Minister may verify the validity of the income reported, expenses deducted, and other amounts claimed, to correctly assess the amount of tax payable. Therefore, to the extent you are claiming automobile expenses, meals and entertainment costs, or any other business expenses, you should retain the documents or invoices that support your expense claims. To the extent automobile expenses are incurred in part for personal purposes, a record documenting total distance travelled and distance travelled in the year to earn income needs to be maintained.
Without these documents, you might not be able to support deductions for otherwise valid business expenses against your source of income. In addition, if you are ever subject to an audit, good accounting records will save you time and money in dealing with Canada Revenue Agency (CRA).
The failure to keep adequate records is also an offence that can result in conviction in a fine or imprisonment, or both.
You are generally required to retain the records supporting your business expense claims for at least six years after the end of the year to which the records relate. Some records must be kept for at least two years after the day a corporation is dissolved or six years after the year in which a business ceased. In addition, the CRA may specifically require you to keep records for an additional period of time. As well, you may wish to retain your records for a longer period, for example to support a net loss that is carried forward and claimed in a much later year.
You may destroy your books of account and records at an earlier time than outlined above if you receive written permission from the CRA. To get such permission, you (or an authorized representative) can complete Form T137 or apply in writing to your Tax Services Office.
If you would like more information regarding the maintenance of adequate accounting records for the purposes of complying with income tax legislation, seek the advice of a Chartered Professional Accountant.
Self-employed professionals who are accountants, dentists, lawyers (including a Quebec notary), medical doctors, veterinarians, or chiropractors have the ability to defer a portion of their professional income for tax purposes. Where, in the normal course of operations, the professional tracks hours expended on a project that have not yet been billed, this unbilled time, or “work in progress” (WIP), would normally be included in the professional's income for accounting purposes. However, the Income Tax Act provides that where the professional elects in his or her return of income, this WIP can be excluded from the determination of income for income tax purposes until it is actually billed.
The election is made by either attaching a letter to the taxpayer's return stating that the election has been made, or by clearly indicating this information in the financial statements or in an income reconciliation submitted with the return. Once made, the election is valid for all subsequent taxation years and can only be revoked with the consent of the Minister of National Revenue through your local Tax Services Office.
If you are a professional and believe you could qualify for this election, contact a Chartered Professional Accountant to help you determine if it is available to you.
In computing income from a business, capital cost allowance (CCA), or tax depreciation, is allowed as a deduction. When capital assets are purchased and available for use, they are grouped into classes based on the type of capital asset purchased. CCA is claimed annually against each class and the amount of the CCA claim is discretionary subject to the maximum limit. The "declining balance" method is used for most classes. Under that method, the maximum CCA you can claim against each class is a fixed percentage of the undepreciated capital cost (UCC) balance. The UCC balance is the capital cost of the capital assets in a class less previous CCA claims deducted.
For most assets, only one-half of the CCA you could otherwise claim for the assets is allowed in the year of acquisition. As a result, acquiring an asset just before your year-end, instead of just after, will accelerate the timing of your tax write-off.
If you would like more information about the timing of your capital asset purchases, seek the advice of a Chartered Professional Accountant.
If at the end of a year you own shares of a company that went bankrupt in the year or is an insolvent corporation (as defined in the Bankruptcy Act or the Winding-up Act), you might be able to claim a capital loss on those shares on your income tax return for the year. The capital loss arises from a deemed disposition of your shares for zero proceeds if you elect to do so in your tax return for the year. To qualify for this election, the corporation must generally be bankrupt or otherwise insolvent and expected to be wound up or dissolved with the fair market value of your shares determined to be nil.
There is no formal election to file to claim the capital loss on such shares; the election is made in your tax return by reporting the disposition of the shares for zero proceeds on Schedule 3. The CRA has stated that in order to make a valid election you must send CRA a letter to advise them of the election, and provide details of the investment, but the Tax Court of Canada has repeatedly held that the Income Tax Act does not require any such letter.
Where the loss is on shares of a "Canadian-controlled private corporation" (CCPC) engaged in an active business, the loss qualify as a "business investment loss" (BIL) if certain criteria are met; because only half of capital losses are allowable, only half of a BIL is an “An allowable business investment loss is a capital loss and half of which is deductible against other sources of taxable income.allowable business investment loss” (ABIL). The CRA will review all ABIL claims so you need to have evidence of the original investment, proof that the company in which you invested was a CCPC engaged in active business carried on principally in Canada, and support there was a loss triggering event in the year.
Contact a Chartered Professional Accountant to see whether you might be able to claim a capital loss for an investment in shares and whether the resulting loss might qualify as an ABIL.
If, at the end of a year, you are owed a loan amount that is no longer collectible, you might be able to realize a capital loss on that loan. Only half of a capital loss is allowable and is subject to certain limitations that can result in the loss being suspended (available later) or deemed to be zero. A capital loss can only be used to offset capital gains realized in the year, in the prior three years, or in any future years.
The capital loss on a loan determined to be a bad debt is calculated as a disposition of the loan for zero proceeds. For the capital loss to be permitted for income tax purposes, the loan must have been made for the purpose of earning income from a business or property, or received as consideration for the disposition of capital property to a person with whom you were dealing at arm’s length. The loan must have been established by you to have become uncollectable in the year.
There is no formal election to file to claim the capital loss on such a loan; the election is made in your tax return by reporting the disposition of the loan for nil proceeds on Schedule 3. The CRA has stated that in order to make a valid election you must send CRA a letter to advise them of the election, and provide details of the loan, but the Tax Court of Canada has repeatedly held that the Income Tax Act does not require any such letter.
If the loan was to an arm's length Canadian-controlled private corporation (CCPC) engaged in an active business carried on principally in Canada at some point in the twelve months prior to becoming a bad debt, the loss may qualify as an “An allowable business investment loss is a capital loss and half of which is deductible against other sources of taxable income.allowable business investment loss” (“ABIL”) which is deductible against other sources of taxable income. The CRA will review all ABIL claims so you need to have evidence of the amount of the loan, proof the company to which you lent the funds was a CCPC engaged in "active business" in the twelve months prior to becoming a bad debt, support the loan was made to earn income from business or property, and the nature of the loss triggering event in the year.
Contact a Chartered Professional Accountant to see whether you might be able to write off a loan, and whether the resulting loss might qualify as an allowable business investment loss.
If you moved in 2016 for employment, self-employment, or to attend a university or other post-secondary educational institution, you may claim a tax deduction for certain moving expenses if:
You may claim mover’s transportation costs, storage charges, insurance, personal transportation costs for you and your family, the costs of cancelling a lease at your former living location, and lodging and meals for up to 15 days near your former or new living location. If you sold your former residence, you can claim the costs of selling that residence including advertising costs, legal fees, real estate sales commission, mortgage prepayment penalties, and various other costs. If you sold a property at your former living location and acquired a property at your new living location you can deduct certain costs of the purchase such as property transfer taxes in connection with the purchase of your new residence (but not GST or HST on the new residence).
The costs of automobile and meals incurred in the move may be the actual costs (within reason and subject to certain limits) or the CRA flat rate costs. For an automobile, it can be the actual operating costs for the year prorated over the total mileage for the year relative to the mileage for the move. Alternatively it can be based on the 2017 flat rate in British Columbia of $0.475 per km. For meals it can be the actual costs or the 2016 flat rate of $17 per person per meal up to a maximum of $51 per person per day.
You must claim the deduction for eligible moving expenses in the year of the move up to the amount of your income from your new living location. If your deductible moving expenses exceed your income in the new living location, the excess can be deducted in the following years. Deductible moving expenses to study as a full-time student at a university or other post-secondary educational institution can only be deducted against income earned in the year from scholarships, fellowships, bursaries, certain prizes, and research grants, that are included in income for tax purposes.
If you move for employment purposes, you may not claim a deduction for any expenses paid by your employer on your behalf that were not included as a taxable benefit to you. Expenses you incurred that your employer reimbursed or expenses for which you have received an allowance are also not deductible unless the reimbursement or the allowance is included in calculating your income.
You should consult a Chartered Professional Accountant when considering a move to determine what costs are deductible.
If you are required to use your passenger vehicle for business or employment purposes, you are permitted to deduct reasonable expenses for operation and ownership of the vehicle. Such expenses include fuel, licence fees, insurance, repairs and maintenance, depreciation finance charges, and lease payments. There are specific limits placed on the amount of depreciation, finance charges, and lease payments you are permitted to deduct, which vary from year to year. The deductible portion of automobile expenses is based on the proportion of your total kilometres driven in the year for business or employment purposes relative to the total kilometres driven in the year.
Driving between your home and your normal place of business or employment is generally considered a personal activity, therefore, the automobile expenses in respect of this portion of your driving is not deductible unless you make a stop for business or employment purposes while traveling to or from your home. The travel between your home and your employment is considered a personal activity even if you drive a vehicle with your employer's logo on it or your employer requires you to have the vehicle to be "on call".
To support your automobile expense deduction you should maintain a complete record of your business and employment use of the vehicle, including the date, destination, the distance driven, and purpose for each business trip. If you are audited by the Canada Revenue Agency (CRA) and you do not have a mileage log, the CRA may deny your claim for the expense. There are mileage tracking software programs and apps to make recording your mileage easier.
If you receive a reasonable per-kilometre allowance from your employer for the use of a motor vehicle, that allowance is not included in your income and you are not permitted to deduct your actual motor vehicle expenses. The reasonable per-kilometre allowance rates for 2016 are $0.54 per kilometre for the first 5,000 kilometres driven and $0.48 per kilometre driven after that.
Where you receive both a reasonable per-kilometre allowance and a flat allowance, the entire amount must be included in your income but you may deduct your actual expenses. To deduct your actual expenses, you must have a Form T2200 signed by your employer to certify that the conditions of your employment require you to use your vehicle. A separate Form T2200 is required for each year that you deduct automobile expenses. The CRA does not require you to file the T2200 with your tax return but you must retain it in case they wish to see it.
If you believe you might be eligible to claim automobile expenses on your personal income tax return, consult a Chartered Professional Accountant to help you calculate your allowable deduction.
The income tax rules related to home office expenses (technically called "work-space-in-the-home expenses") are similar for self-employed individuals, non-commissioned employees, and commissioned salespersons, but there are certain important differences.
For Self-Employed Persons
In order for you to deduce your home office expenses from self-employment (business) income, your home office must be
Deductible home office expenses for a self-employed person include rent, repairs and maintenance, insurance, property taxes, mortgage interest (but not the mortgage principal), and utilities (to name a few). The deductible portion of these costs is a "reasonable amount" which is typically calculated based on the square footage of the home office as a percentage of the total square footage of the home.
You may claim a deduction for depreciation on the building but doing so could jeopardize the status of your home as your "principal residence" for purposes of claiming the "principal residence exemption" to offset the capital gain on the property when it is sold.
Your home office expense deduction in a year cannot exceed your net business income for the year before the deduction.
For Non-Commissioned Employees and Employees who are Commissioned Salespersons
For employees, the home office must be the place where the employee principally (more than 50%) performs his or her duties of employment or the home office is used exclusively by the employee on a regular and continuous basis for meeting customers and other persons in the ordinary course of employment.
Deductible home offices expenses for an employee who does not earn sales commissions include rent, heat, light, water, and maintenance costs; while mortgage interest, property taxes, and Capital cost allowance is the deduction you can claim over a period of several years for the cost of depreciable property, that is, property that wears out or becomes obsolete over time such as a building, furniture, or equipment, that you use in your business or professional activities.capital cost allowance are not deductible. The deductible portion of home office expenses for an employee is the same as for a self-employed person, being a "reasonable amount" typically calculated based on the square footage of the home office as a percentage of the total square footage of the home.
Employees who are commissioned salespersons may also claim a proportionate amount of insurance and property taxes, but they cannot deduct mortgage interest or capital cost allowance.
For both the commission and non-commission employees, the home office expenses deducted in the year cannot exceed the income from that particular source of employment for the year. Unused expenses may be carried forward and deducted against that particular employment income following year.
Your employer must certify that the conditions of your employment require you to have a home office by signing the Form T2200. Form T2200 is required for each year you wish to claim home office expenses. The CRA does not require you to file the T2200 with your tax return but you must retain the form in case the CRA wishes to see it.
Contact a Chartered Professional Accountant if you have any questions regarding your ability to claim home office expenses as a deduction against employment income or self-employment income.