Running a business is a hard mountain to climb, and naturally, you want to keep as much of what you make as possible. If you’re self-employed, you already know how stressful tax preparation and tax filing can be – keeping track of receipts, staying up to date on the Canada Revenue Agency’s tax policies, and navigating tax season.
So here are some tried-and-true tax tips to help you stay on track throughout the year, maximize your deductions and lower your overall tax bill.
Anyone who is self-employed and uses their home as their place of business has always been allowed to deduct home office expenses. You can deduct business-use-of-home expenses to the extent that they have been incurred to earn business income.
To calculate how much to deduct, add up all your home office expenses and pro-rate them. A reasonable method must be used, such as the area of the workspace divided by the total finished area (including hallways, bathrooms, kitchens, etc.).
For example, John is an accountant and works out of his own home. His office space takes up 900 square feet of his 3,000 square feet house. If John’s office-related expenses totaled $20,000 in the year, he could deduct 30% of the office expenses i.e $6,000.
Utilities including water, gas, electricity, insurance, maintenance, and repairs, mortgage interest, property tax, condo fees are all household expenses that can be deducted. It is important to know that you cannot claim dual-purpose rooms such as a bedroom and kitchen. If you intend to designate a part of your house as part of your home office, it can only be used for the purpose of business activities.
The CRA is also asking home Office users to submit a floor plan of their house upon audit, this is to make sure individuals are accurately estimating their office to home space ratio.
Self-employed Canadians save taxes by paying family members a reasonable salary. This strategy works if you are a self-employed individual and earning more than your family members.
Those earning less than you will be in a lower tax bracket thereby allowing you to save tax. In fact, the first $13,229 of employment income is tax-free. If your children are not working you can save taxes in Canada by paying your children $13,229 each.
The salary will be tax-deductible to you and tax-free for your children. It’s important that an employment agreement be prepared that specifies the duties that your family member will be performing and their hourly range or an annual salary, in addition, a weekly log should be kept to support the time spent working by each family member.
The reason for doing such things is to ensure that there’s a bonafide relationship between yourself and your family members that will help refute any challenges by the Canada Revenue Agency. Let’s look at an example where Paul and Kathy are married and have two children. Paul earns $250,000 a year; his tax rate is 40% so he owes $99,500 in taxes. Paul can split his income with his family members to reduce the taxes he owes.
Paul pays his wife Kathy 60,000 then he pays his two children Bruno and Christie $20,000 each these leaves $140,000 of income for Paul. Now each family member’s income will be taxed at their own tax rates. Paul’s income will be taxed at an average of 32.4% which equals 45,363 of taxes payable, Kathy’s income will be taxed at 18.12% which equals 10,870 of taxes payable both Bruno and Christie’s income will be taxed at an average rate of 10.35% which equals $2,070 of taxes payable for each.
Before incorporating, Paul owed 99,500 in taxes. After income splitting with his family, the total family taxes were reduced to $60,373. Therefore, Paul has saved himself $39,127 ($99,500 – 60,373).
This is a difficult process so it is best to be in contact with an accounting firm so they can help you better.
Canadians who own their own business can save taxes by leasing a vehicle for their business. Vehicle costs that can be deducted for tax purposes include repairs, fuel insurance, and lease charges. The maximum monthly lease amount that can be deducted is $800 plus taxes anything over and above this limit is non-deductible.
The percentage of vehicle operating costs that can be deducted is calculated as the total kilometers are driven for business purposes divided by the total kilometers driven in the year. For example, if you drove 21,000 kilometers for business purposes during the year and 30,000 kilometers in total then 70% of your vehicle’s operating expenses can be deducted.
Accurate books and records ensure that all expenses are captured, nothing is missed, and appropriately recorded in your business’s financial statements and personal tax returns. The best way to keep accurate books and records is to purchase an accounting software program that accounting firms use such as QuickBooks.
By incorporating your company, your business profits will be subject to a very low tax rate of 12.20%. On the other hand, the business profits of an unincorporated business are included in the owner’s taxable income which is taxed at 53.53% if you’re in the highest tax bracket.
For individuals who are higher-income earners may want to invest in an individual pension plan or IPP. Unlike a registered retirement savings plan, IPP will allow you to continue living a high-income lifestyle upon retirement. IPP is a defined benefit pension plan that is registered with the provincial government as well as the CRA.
Contributions made to an IPP are tax-deductible for the employer or the participant if someone contributes directly to the IPP. The annual contribution amount of the IPP is established by an actuary and is tax-deductible. In fact, the annual limit of an IPP could be greater than that of an RRSP.
This trust is a tax-free vehicle used for your corporation to finance its employees’ health care expenses. You should set up an account exclusively for the purpose of health care spending by employees.
Setting up a health and welfare trust can benefit in two key tax-saving strategies: first contributions made to the trust are tax-deductible to corporation number two when the trust is used to pay for a medical expense incurred by an employee funds can be withdrawn from the trust on a tax-free basis.
The small business deduction is a reduction in corporate taxes for Canadian-controlled private corporations or CCPC’s. The reduced rate of tax is available on active business income up to the corporation’s business limit for the year. The federal business limit is $500,000.
If you’re self-employed or an independent contractor, the tax professionals at Filing Taxes can help you maximize your tax deductions and save money.
Filing taxes has worked exclusively with small business owners, farm operators, independent contractors, and entrepreneurs. If you have any further questions related to the tax-saving tips for self-employed in Canada feel free to contact us through our website filingtaxes.ca or reach out at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
Like all other taxpayers in Canada, self-employed people are responsible for paying the same federal and provincial income taxes. The main difference is that self-employed individuals do not have taxes automatically deducted from their paycheques. It's up to them to keep track of what they owe and pay it on time.
Because taxes aren't withheld from paycheque by any employer and paid to CRA, take-home pay for the self-employed tends to be higher than it is for wage earners. However, unless you want the CRA to come knocking, it's wise to set aside a chunk of those funds to cover your tax obligations.
Rather than trying to guess how much you're going to earn, or scramble to find the money you need to pay your tax bill, you can decide what percentage of your income you intend to pay in estimated taxes. Then, set aside that amount from each payment you receive as a self-employed individual. you should have enough saved to cover your small business taxes.
Land somewhere between the 30-40% mark of your business income to cover your federal and provincial taxes.
Home office expenses; Internet and phone bills; Health insurance premiums; Meals and entertainment; Travel; Vehicle use; Interest; Publications and subscriptions; Education; Business insurance; Rent; Start-up costs; Advertising; Retirement Plan Contributions.
Self-employment can give you financial rewards and independence from employers. You are your own boss - you decide when, where, and how to work to get the job done. As a self-employed business owner, you have the freedom to make decisions that shape the present and future for yourself and your family.
Being self-employed, your business earnings and your personal incomes are the same as far as the Canada Revenue Agency (CRA) is concerned. There’s no separate income tax rate for money you make from your business. What this means is that the income tax rates for sole proprietors are the same as for individuals. However, you do need to pay Canadian Pension Plan (CPP) contributions, and you have the option of making Employment Insurance contributions as well.
So, the total of your tax obligations would be income tax + CPP + EI (optional).
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.