Tax preparation can be a real hassle, especially if you’re self-employed. Being self-employed may make you feel free, but that freedom comes at a price. You will need to do your tax preparation and calculate what you might owe in taxes and other CRA payments. You also need to know when to remit them. So we put together this guide to help you with your self-employed tax preparation.
There are 2.9 million Canadians who are self-employed and run their own business. That is 15% of the population, and the number is steadily increasing. But remember, with your self-employed status comes significant responsibilities and a new relationship with the CRA. If you want to make it a happy relationship, you need to make several remittances throughout the year. If you have employees, you need to make payroll remittances for staff, employment insurance and contributions, as well as regular income tax payments. The burden can sometimes be overwhelming since you need to keep on top of what you owe, and you need to plan and self-assess with precision, so how can you make your tax preparation for self-employed more comfortable?
Make it easier on yourself and hire a tax preparer to help you. If you live in the Greater Toronto Area, Aridan Accounting and Tax Service is an excellent choice. We can help you with all your accounting and financial needs, and handle your tax preparation.
For over 10 years, we have been helping architects, real estate agents, interior designers, and many more self-employed Canadians make the most of their income.
You are obliged to file your tax return on time each year, which is the 30th of April. Unincorporated business owners have until the 15th of June, but there’s a catch. If you owe the CRA money, they will charge interest from the 30th of April. So, you’re always better off filing by the normal tax filing due dates.
Being the business owner, it is your responsibility for keeping records of income, expenses, and asset purchases. So, if you aren’t good at keeping records, consider getting help. As an entrepreneur, you might be cautious about your budget and hesitant to outsource work, but this isn’t where you want to cut corners.
Part of your self-employment tax preparations includes having your personal and business records available at all times for the CRA. If the CRA wants to do an audit, you must present receipts, contracts, bank statements, invoices and journals, as well as credit card statements and mortgage documents. So, you see how important it is to keep all records in order. They might even ask to see records of people who aren’t being audited, like your spouse, trusts, coops, family members, and partnerships.
Your financial records of the whole household and related associations can become subjects for investigation.
Suppose you pay a family member to work in your business. If it is someone related to you by blood, marriage (including common-law), or adoption — you still must have a subcontracting or formal employment agreement in place. If it’s an employment agreement, you need to show a similar contract to what you would have offered a stranger. The pay needs to be reasonable and almost identical to what you would have offered a “normal” employee.
You must also provide the terms and conditions of the employment, like hours, place of work, and the work’s scope and nature.
Like we mentioned earlier, if you hire someone, you need to make mandatory statutory deductions for income taxes at the source, CPP, and EI. Sometimes EI (Employment Insurance) won’t be applicable for related people, so the benefits won’t cover them if their employment ends. The criteria to determine who’s eligible are extensive and start by validating the worker’s status. So, formal employment agreements play a vital role for this purpose.
If you fail to make source deductions, you will face substantive penalties. You have to pay 10% of the non-deducted amount plus interest, in addition to the required remittance. More if you have failed before.
In 2018 a new tax came into play. The so-called Tax on Split Income (TOSI). It applies to family members that receive forms of remuneration from private family service businesses – mostly dividends. If the family member isn’t sufficiently active in the business, these dividends will be taxed at the highest federal marginal tax rates. This means that the burden of proof and payments falls on the non-active family member and not on the business owner.
These rules exclude employment income, but they apply to all family members unless they are excluded for one of the following reasons:
Expenditures may have a mixed component to them. Some items are not fully tax-deductible. For example, write-offs for the office part of your home or auto expenses are subject to particular scrutiny. Therefore, always make sure to separate your work area from the rest of your home. Then claim only a small part of the total expenses. You can determine that fraction by multiplying the total costs by the workplace square footage over the whole home’s real square footage.
Concerning auto expenses, it is essential to keep a detailed travel log to calculate distance driven for business during a base year, i.e., one full 12-month period. If your driving varies more than 10% over the base year, you only need to keep the log for more than three representative months. You will have to prorate the total current expenses by the distance traveled for business over the total distance traveled to the correct business portion of costs.
Business assets are subject to different treatment. Such investments are accumulated in asset pools. There are some exceptions, for example, buildings valued at over USD $50,000 and luxury vehicles. If assets have a useful life above one year, then the acquisition cost is mentioned on the depreciation statement, prorated to the asset’s allocated business use. Various rates and rules will be applied to get to the deductible portion of the expense of wear and tear. The deduction, called Capital Cost Allowance (CCA), is always taken at your option. So you don’t need to deduce the current year if you consider it more useful next year when income is expected to be higher, i.e., lowering your taxable income. It is possible to use CCA to create a business loss, although not a rental property.
It should be noted that you must add back the CCA taken on disposition if the asset’s value appreciated rather than depreciated. This is generally known as” recapture.” You may also have to report a capital gain if the value has increased over the original cost. This may typically happen with real estate. However, in order to offset income, a terminal loss is added to your business statements if you did not claim enough deduction.
The year’s income will be offset by proprietorship losses, the three preceding years, or the 20 coming years. That’s why they are so lucrative. By claiming losses, additional tax refunds may be generated from the past or in the future. However, CRA will keep looking for profit motives for income tax purposes. Your business is a commercial activity and not a hobby. It is pursued profit. However, for GST/HST purposes, no expectation of profit is necessary for somebody to be considered in business. To have commercial activities in competition with enterprises focused on profit will do.
Does it seem like a lot to keep in mind? Well, it is, and that is why it is better to have your tax preparation for self-employment down to a science. The last thing you want is to be audited by the CRA, so however reluctant you are to outsource your tax preparations, you could save a lot of time and money by hiring Aridan Accounting and Tax Services.
