Many Canadians choose the challenges and the freedom of being their own boss. As a self-employed taxpayer, you can deduct many of the costs of running your business.
Note: Under Canadian tax law, a business is defined as a “profession, calling, trade, manufacture or undertaking of any kind whatever.” There must be a “reasonable expectation of profit” over time.
If your business is NOT incorporated: you must file an individual tax return each year. You will report your income as business or professional income.
If your business is incorporated: you must file a corporate tax return each year. Your business income will be taxed at corporate tax rates.
Tip: Canadian Controlled Private Corporations that earn “active business income” may claim the small business deduction. This will reduce the rate of corporate tax they pay. As of January 1, 2009, businesses with active business income up to $500,000 can claim this deduction. Learn more now from the Canada Revenue Agency.
Business expenses you can claim
Business expenses are sometimes referred to as “write-offs.” Under the Income Tax Act, though, you cannot write off personal and living expenses. So what happens if you have expenses with both a personal and a business component, such as travel expenses incurred while away on business? You may only claim the business portion of these costs. You must remove any personal component.
Note: Some business expenses, such as amounts incurred for meals and entertainment, are restricted to 50% of either:
- the actual amount spent, or
- an amount that is reasonable in the circumstances, whichever is less.
For most expenses that you incur to earn business income: you can deduct any “reasonable” cost from your business income.
For expenses that you incur to buy capital property: Capital property includes things like furniture or computer equipment, or even a building that you buy for business use only. You are entitled to write those types of costs off over time in the form of depreciation. The Canada Revenue Agency calls this a Capital Cost Allowance (CCA). Different types of property have different CCA rates. For example, the rate for cars is 30% and the rate for furniture is 20%.
Learn more now from the Canada Revenue Agency.
Tip: You can deduct the full cost of any computers your business bought after January 27, 2009 and before February 1, 2010. You do not have to depreciate this cost over time.
Home office expenses you can claim
With advances in technology, many people now work from home. Or, they run home-based businesses. To deduct expenses for the business use of a work space in your home, you must be able to say ‘yes’ to at least one of these statements:
- It is your main place of business. Or, where you mainly do your work.
- You use the space only to earn your business or employment income. You use it on a regular and ongoing basis to meet clients, customers or patients.
To calculate the business portion, use a “reasonable basis.” For example, use the area of your work space divided by the total area of your home.
If you own your home: you can deduct the business portion of these expenses:
- your mortgage interest
- property taxes
- capital cost allowance.
If you rent: you can deduct the business portion of these expenses:
- home insurance
- cleaning materials.
Note that you cannot use home office expenses to create a business loss. Or, if you are employed, your home office costs cannot exceed your work income.
Learn more now about running a home-based business from the Canada Revenue Agency. Employees can read more here.
Paying tax by installments
If you are an employee, your taxes are withheld directly from your pay cheques. Likewise, if you are self-employed, or earn investment or rental income, you will likely have to pay your tax in regular instalments. For 2010, you must pay by instalments if your net tax owing is more than $3,000:
- In 2010; and
- In either 2009 or 2008.
You must pay your instalments quarterly. The due dates are: March 15, June 15, September 15 and December 15, 2010.
Tip: In the first year that you are self-employed, you do not have to pay tax instalments. It is still a good idea to set aside part of your earnings each month to cover your tax liability in April. If you don’t, you could be in for a nasty surprise at tax time.
To pay your instalments, you have three options:
- No-calculation option: use this if your income, deductions and credits stay about the same from year to year. Pay the amount noted on your installment reminder.
- Prior-year option: use this if your current income, deductions and credits will be similar to the prior year, but quite different from other years. If you make instalments on time throughout the year but have to pay more when you file your tax return, you will not have to pay interest.
- Current-year option: use this if your current income, deductions and credits will be largely different from other years. Just be aware that if your instalments turn out to be too low, you will have to pay interest.
Try to choose the best option for your situation. That way, you can avoid overpaying your tax during the year, or having a large amount to pay when you file in April. Learn more now from the Canada Revenue Agency. Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.