Money & Career

Taxes 101: How to file if you're self-employed

By: Lisa van de Geyn

Getty Images Author: Canadian Living Credits: Getty Images

Money & Career

Taxes 101: How to file if you're self-employed

By: Lisa van de Geyn
With tax season around the corner, it’s that time of year when self-employed folks across the country scrounge up their receipts and sift through paperwork. When you’re self-employed and own your own small business, doing your taxes isn’t quite as simple as collecting your T4 at the end of the year. Here’s what you need to know to file your 2015 income tax return.

Am I a business?
Canada’s tax law says a business is a “profession, calling, trade, manufacture, undertaking of any kind whatever or an adventure or concern in the nature of trade.” Your business can either be a sole proprietorship (if you’re venturing out on your own), a partnership (if you have a partner) or a corporation (a business that makes larger amounts of money than a sole proprietorship or partnership). New businesses need to show proof that they expect to turn a profit and must have a recognized start date. The perk? The deductions you can make if you’re self-employed.

Am I charging GST/HST?
According to the Canada Revenue Agency (CRA), if you sell “taxable goods or services in Canada and you are registered for a GST/HST account, you must charge your customers GST/HST” for your province or territory. The amount you collect isn’t disposable income—you must remit all net tax owing when you file your taxes. Be sure to keep records of the amount of GST/HST you’ve collected and how much you’ve paid on business expenses.

What can I deduct?

Self-employed folks can take advantage of more write-offs than employees bringing home a T4. The CRA has a comprehensive list of all deductions—from business start-up costs and capital expenses (a new computer or a desk, for example) to a portion of your mortgage payments, rent, utilities, home insurance and even property tax. To do this you’ll have to figure out the percentage of your home that can be allocated for office space. You can get this figure by taking the square footage of your workspace and dividing that by the total square footage of your home. For example, if your home is 2,500 square feet and you use about 250 square feet for your office, the percentage of your home allocated for business is 10 percent.

When do I file?
You have to pay what you owe before the April 30 deadline, just like everyone else. Self-employed folks have until June 15 to file returns. “People get scared of filing a tax return because they’re afraid it will trigger some kind of vengeance on the part of CRA if they don’t pay right away. But in fact it’s filing late that CRA cares about, much more than delayed payments,” says Sunny Widerman, an accountant and owner of Toronto-based Personal Tax Advisors.

Are my kids or spouse deductible?
Yes, if they work for you, you can pay your significant other and/or kids. The money paid to them is tax deductible, as long as the salary you’ve paid them is reasonable for the work they’ve done. (In other words, don’t bother trying to claim you’ve paid your son, say, $40,000 for loading boxes into your car.)

What about my car expenses?
If you use your vehicle to conduct business, you can deduct expenses, as long as you have the receipts to support them. You’ll need to keep a detailed log every time you use your car for work and include the date, destination, purpose of trip and number of kilometres you drive.

Can I get employment insurance?
If you want to be eligible for EI, which includes benefits for taking maternity, parental, sickness and compassionate care leave, you have to register.

What’s the best online resource to answer my questions?
You can find virtually everything you need to know about running your small business from the CRA’s site. Sign up for e-services to handle all of your tax-related issues. Register for My Business Account if you file GST/HST, payroll or corporation income tax or My Account if you report your business income on your personal tax return.

How much should I be setting aside for taxes?
“Setting aside tax on your earnings is key. More than one new self-employed person has come to my office and been shocked and dismayed to find as we complete their return that they have a bill outstanding,” says Widerman. “Owing tax, rather than getting a refund, is often a new experience to people who are accustomed to having their employer withhold tax at source.” If you’re disciplined and hold back some of each invoice you send, you’ll be in a better position than trying to scrape funds together at tax time. Says Widerman, “Set aside at least 15 percent of your gross (or up to 25 percent if you want to be really safe) during the year to avoid the shock of an unmanageable tax bill at the end of the year.”

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Money & Career

Taxes 101: How to file if you're self-employed