Did you recently start a side hustle, become your own boss, or are seeking to launch a business idea that is truly yours? If so, you likely fit into the category of being self-employed or a freelancer!
There are many perks to being your own boss which, of course, don’t come without their own set of costs. You may now be facing higher taxes or the additional work of maintaining records. Hence, it’s imperative to be well versed and proactive in understanding the tax compliance rules established by the Canada Revenue Agency (CRA). It can ensure you are maximizing on deductions and enable you to form a structure to keep track of records (if you are ever audited by the CRA).
Keep track of documentation and save for six years
Receipts are considered the financial dashboard of how much money you spent throughout the year. Ensure that you hold on to all receipts and invoices that are pertinent to income earned from your business—whether it was for providing services or selling products. CRA recommends holding on to paperwork for up to six years. If you lack back-up documentation, CRA has the right to impose interest or penalties, and your claims can be disallowed. Additionally, it is highly recommended that you have separate credit cards and bank accounts for personal and business-related transactions.
However, keeping track of all required paperwork can be a hassle and can result in misplacement or accidental discarding.
There is a solution! We recommend using apps like Expensify, Hubdoc, Receipt Bank, and QuickBooks Self-Employed online tracking that will capture, store and organize all your receipts on a single platform for you. You can import receipts or invoices from photos or even forward them from your email. These apps automatically extract line items from each receipt using artificial intelligence and sync with most cloud-based accounting software.
They are convenient and will easily allow you to keep a track of all your documentation, (remember, it’s your proof for every expense deduction claimed on your tax return). Make it a priority to keep your financial records—from your business receipts to your employees’ payment records—organized and in check all year round.
Set aside a budget for income taxes and retirement savings
The moment you start bringing in income, you should create a budget for taxes. Unlike salaried employees, payroll deductions such as Canada Pension Plan (CPP) and income taxes are not withheld at source. Therefore, it is crucial you set aside funds for the employer and employee portion of CPP (9.9%) that you’re required to contribute to by the annual deadline (April 30th).
With regard to income taxes, you should set aside funds based on your personal tax bracket. For instance, if your marginal tax rate is 35%, consider setting aside 35% of your earnings and segregating the money into a separate account until you’re ready to make the payment.
As a freelancer or when you’re self-employed, you may not have the privilege to contribute to matching company pension plans. Therefore, consider contributing to an RRSP. An RRSP will help reduce your taxable income in the current year so you may defer paying taxes until the money is withdrawn when you’re in a lower tax bracket.
Keep track of your income tax deadlines and arrange CRA payments
Whether your business is profitable or not, it is mandatory to provide the business’ income and expense details on your income tax return. As a sole proprietorship, you will need to complete and submit the T2125 form (Statement of Business and Professional Activities) in addition to your general personal income tax return. The deadline for filing your return is June 15th if you’re self-employed. However, you must still pay taxes owing by April 30th.
If your taxes owing is more than $3,000 in the current or previous two years, you will be required to pay quarterly installments. There could be interest and penalties incurred by the CRA if you miss meeting your income tax filing and payment deadlines.
In order to avoid being hit by a huge tax bill or missing deadlines, it may be wise to make it a habit of estimate taxes owing based on your income throughout the year and make monthly or quarterly tax payments to CRA by setting them up as an online vendor via online banking.
Business use of home expenses
Many freelance and self-employed individuals operate from offices at home, but not all realize that you can deduct expenses related to your home office. These can include insurance, mortgage interest payments, repairs, utilities, and other home-related expenses.
For this category of deduction, you have to determine what portion of your home is dedicated to running your business. The formula used:
Square feet of workspace/Total Square feet of your home = % times total Home Expenses
Motor Vehicle Claims
Personal motor vehicle use for earning business income can be claimed as a portion of business expenses. You can calculate the percentage used for business trips and apply it to your overall car expenses. In practice, you must keep a logbook to track the total kilometres driven plus business kilometres driven during the year.
As per CRA, travel between a regular workplace and home is not considered business-related because most workers are normally required to work away from your principal place of residence or in different places.
You are required to register for a GST/HST number once your gross income reaches $30,000 in a 12-month period. Once this is achieved, you will need to start charging and collecting GST/HST from your clients and customers, depending on which province the business or person you’re charging has their tax base.
It is your responsibility to register voluntarily. The government will not send you a notice or warning to register for a GST/HST number.
Consider incorporating your business
From a tax point of view, incorporating your business can be beneficial, especially if your business has reached a steady profitable level, meaning that you have enough of an income to offset the costs and are able to set aside a portion of your business earnings in the corporation. The purpose of this is to be able to benefit from corporate tax deferral strategies.
Your corporate profits will be taxed at a much lower rate in comparison to personal income, unless and until you decide to pay yourself a bonus or dividend.
Determining how to structure your company is an important decision that may have a significant impact on your business going forward. It can be valuable to consult a qualified tax and legal advisor to ensure that you have taken into account all of your considerations before deciding whether or not to incorporate.
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact your advisor or accountant to discuss these matters in the context of your particular circumstances. Vartika Satija, CPA, CA do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.