Tax implications Tax implications of self employment
Mon Apr 5, 10:03 AM
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By Talbot Boggs
(Special) – As job losses mounted during the economic recession, more and more Canadians started their own businesses and joined the ranks of the self employed, which is now estimated at more than two million.
There are tax implications to becoming self employed. “You have to know what you can claim because there is a difference between a personal and small business return,” says Cleo Hamel, Senior Tax Analyst with H&R Block.
One of the first differences is that you have until June 15 to file a business tax return, although if you owe Revenue Canada money the interest will begin on April 30.
If you do become self employed, you may have to pay income tax in instalments, you generally are not eligible for employment insurance benefits, and you will have to register for GST/QST if your annual taxable sales revenue is greater than $30,000 a year.
A self employed person can deduct expenses as long as they are related to the business and are reasonable in amount.
There are basically four types of deductible business expenses – home office, automobile, meals, entertainment and convention expenses.
Home office expenses include rent, if the individual is a tenant, mortgage interest (but not the principal), property taxes, utilities, telephone, fax and insurance.
There are some restrictions. You only can claim against your income from your business, you cannot create a loss with home office expenses, the home office must be a principal place of business, it must be used exclusive for business and used on a regular and continuous basis.
Automobile expenses are deductible based on the number of kilometres driven for business as a percentage of the total distance driven. Eligible expenses include gas, insurance, registration, repairs, interest on financing the vehicle, leasing costs and capital cost allowance.
The meals and entertainment deduction is limited to 50 per cent of expenses provided they are related to business activities. Quebec has additional restrictions on meals and entertainment based on the taxpayer’s revenue from the business.
Deductions also are allowed for attending two conventions during the year related to the individual’s business. To be deductible, the convention should he held in a location that is within the scope of the host organization.
As a sole proprietor of your business, you will have to fill out the T2125 form, a statement of business activity, which can be included on your personal return. In general, you are entitled to more deductible expenses as a self employed person than you would as an employee for an organization.
If your business gets big enough, you may consider incorporating it. The benefits of incorporation are that it limits your liability by making it a separate legal entity and provides the opportunity to save and defer tax and split income.
There are costs associated with incorporation as well, such as setting up the articles of incorporation, annual costs of filing corporate tax returns, regulatory filings, accounting costs and preparing financial statements. As well, you lose the ability to offset corporate losses against other income earned personally and you are subject to a higher corporate tax rate.
“It’s really important to keep records such as home and office expenses, how much you’re travelling and who you’re doing business with, especially when starting out, because generally you don’t make much money at the beginning,” says Hamel. “If you’re still not making money in three or four years, Revenue Canada might come back to you and say it is a hobby, not a business, and those records could come in handy.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
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