Banka: Tax write-offs for the self-employed sole proprietor
Last issue, I addressed the available tax write-offs for people who were employed but worked away from the office.
This week, the topic shifts a little—what are the write-offs for people who are operating as contractors or self-employed persons?
The main concern here is whether the person could actually be classified as an employee.
The Canada Revenue Agency has a booklet called #RC4110 Employed or Self-Employed that outlines the criteria used to make that determination.
To give a basic summary, the self-employed person must pick their own hours, must use their own tools and must experience the risks of being in business for themselves.
This last criteria seems to be key. For example, if you make a mistake, do you lose the client, or does your employer?
Having determined that you fall under the self-employed category, reference the CRA booklet T4002 Business and Professional Income Guide.
Both these booklets are downloadable from the CRA website.
Bookkeeping for a self-employed person is very similar to bookkeeping for a corporation, other than the share structure and preparing the tax return.
The profit made by a self-employed person is included in their own personal income tax return and is taxed at the personal tax rates.
On the other hand, the corporation is taxed as a separate entity and taxed at corporate tax rates.
The business owner needs to be able to tell the difference between current and capital expenses.
Current expenses are those expenditures that will be used up in the business in the current year. Capital expenses are those expenditures for items that will be used by the company for more than the current year.
Some examples of these are computer hardware, manufacturing equipment, office equipment, buildings and automobiles.
Capital expenses are collected in various classes and are amortized or depreciated over the expected life of the asset or the corresponding lease or the life of the business depending on the type of asset.
The amortization or deprecation for tax purposes is called the Capital Cost Allowance or CCA.
Some of the current expenses are items such as advertising and promotion—for all those gifts that you give out to your clients or prospective clients, bad debt expense for writing off those accounts that will never be collectible.
Meals and expenses can only be deducted at 50 per cent and if you are remitting your HST, you can only deduct 50 per cent of the HST that you paid on your meals on your HST return.
You can hold up to six employee dinners per year and deduct the entire cost of these events and the corresponding HST.
If you sponsor or hold an event for charity, that is also totally deductible. If you provide meals to employees at a job site where the employee does not return home every night, those are also 100 per cent deductible.
Of course, there are many different scenarios when it comes to the deductibility of meals and each will need to be reviewed separately as they occur.
If you carry stock, like a corporation, you have the ability to start with an opening inventory count, add the purchases for the year and then deduct the closing inventory count to determine your actual costs of sales.
Included in the cost of sales category could also be your production wages and benefits and any monies paid to subcontractors (yet another self-employed person).
There is also a comprehensive schedule to record your motor vehicle expenses such as gas, repairs, insurance and leasing costs.
If you have a space in the home that you have designated an office and where you can meet prospective business clients, you may also be able to deduct a portion of your home expenses.
The items that you can deduct are your heat, electricity, home insurance, property taxes, mortgage insurance or rent payments, maintenance costs on your home, telephone and Internet costs, strata fees, other utility fees such as garbage pick up and even landscaping.
To determine how much to deduct, measure the area of your office and work out a percentage with the total area of your home.
What you need to give your accountant are the total home expenses for the year, the square footage of your office and the square footage of your home.
The tax software will then calculate the correct amount of office in home expenses for you to deduct.
Finally, if you made a profit and owe tax to CRA, that tax must be paid by April 30 of every year, which is why you are encouraged to make installment payments. The actual tax return does not need to be filed until June 15.
Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.