As tax season nears, it is important for the self-employed to avoid getting on the wrong side of the Canada Revenue Agency (CRA). Here are answers to some of the most common tax questions:
1. Do I need a business number? You only need a business number if you are registering for the GST/HST, you have employees and need a payroll account or you are importing or exporting goods.
2. Do I have to pay CPP? If your net income from your business is more than $3,500, you will have to start paying CPP at double the rate you would if you were an employee. However, you can claim a deduction for the additional amount as well as a non-refundable tax credit for the regular contribution.
3. Can I have losses? You can have losses on your business that can be used to offset other income. If the losses exceed your income from other sources, you have a non-capital loss which can be carried forward to years when you have more income.
4. Do I need receipts? Keep really good records. Self-employed Canadians are more likely to be audited, so make sure you keep your receipts and other documentation to support your business expenses. And the expenses must have been incurred to help you earn your income.
5. Can I use a flat rate for business mileage? If you use your car for business, you must keep a mileage logbook. There is a new simplified method for self-employed taxpayers but you are required to keep a logbook for a year before you can use it. If you do not have a logbook and claim business mileage, your claim may be reduced or disallowed.
6. Do I have to make instalments? If you have tax owing in any two of the last three tax years, the Canada Revenue Agency will request that you make quarterly instalments rather than an annual payment. Failing to make instalment payments could result in interest charges.
7. Do I need a GST number? If your annual revenues are more than $30,000, you have to register for the GST/HST. However, even if your revenues are less than this, it is usually advantageous to register so that you can claim input tax credits for the GST/HST you pay.
8. How much money do I need for taxes? As a general rule of thumb, self-employed Canadians save between 30 to 40 per cent of their income for tax. It is always better to have a little more in your account than you actually need to pay in taxes.
9. Can I claim my mortgage payments if I work at home? If your home is your principal place of business or you use your work space on a regular and ongoing basis to meet your clients, customers, or patients, you can claim a portion of your mortgage interest as a home office expense. The principal is not a deduction. However, the amount depends on the square footage your business or office occupies in your home.
10. Do I have to pay EI premiums? You do have the option for registering in the EI program for self-employed persons. However, this program does not provide coverage if your business fails. It only provides maternity, parental, sickness and compassionate care benefits.
Cleo Hamel is a senior tax analyst for H&R Block Canada