Do you know how to maximize your deductions?

When self-employed or small business owners file their taxes they are entitled to claim certain business-related expenses to reduce their tax obligations. It is important to understand what constitutes a business-related expense in the eyes of the CRA (Canda Revenue Agency).

Business Expenses You Can Claim

The CRA permits any reasonable expense incurred for the purpose of earning an income. The definition of a reasonable expense for one business may not apply to another type of business. For example, an independent contractor in the online teaching space could deduct stickers and toy props as a reasonable business expense, while of course, a plumber could not. Again, it must be a reasonable expense. A $200 Lego set would most likely not be considered reasonable and might even result in an audit. If your taxes are particularly complicated, consider using tax preparation software or consult with a tax professional. The cost of accounting-related services are, of course, deductible.

Keeping Business Expenses Separate from Personal Expenses

If you are using services or equipment for both business and personal activities, you can only deduct the portion that is directly related to your business. For example, if you work from home and claim your internet charges as a business-related expense, remember you are only entitled to claim the portion relating to your business usage. The deduction is not intended to cover personal use. Vehicle expenses are another good example of this. You are required to support your expenses with documentation. This is why it is so important to keep your business-related expenses organized. From receipts to mileage logs, organizing your important business-related expenses will save you in the long run.

Business-use-of-home expenses

If you use a workspace in your home you can deduct business-use-of-home expenses if one or both of the following apply:

• This is your principal place of business
• You use this place only to earn your business income. It is not used for other purposes, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

As part of the business-use-of-home expense, you can deduct part of your maintenance costs such as heat, home insurance, electricity, and cleaning. A portion of your property taxes, mortgage interest, and CAA can also be deducted. To calculate the portion you can deduct, use a reasonable estimate such as the actual area of the workspace divided by the total area of your home. For example, if your home is 2000 square feet and your home office is 400 square feet, your office space is 20% of the total area of your home.

If you, like many self-employed individuals, use part of your home for both business and personal living, you can calculate how many hours in the day you use the rooms for your business, and then divide that amount by 24 hours. You then, multiply the result by the business part of your total home expenses. This will give you the household cost you can deduct. If you run the business for only part of the week or year, do the calculation to reduce your claim accordingly.

More information from the CRA on the business-use-of-home expense can be found here.

For those who rent their home, you can deduct the part of the rent and any expenses you incur that relate to the workspace.

The CRA gives the following great example of how to actually calculate the business-use-of-home expense:

Calculation of business-use-of-home expenses

• Heat$ 1,200.00 
• Electricity$ 1,000.00 
• Insurance$ 650.00 
• Maintenance$ 350.00 
• Mortgage interest$ 8,000.00 
• Property Taxes$ 1,800.00 
• Other expenses (specify): Water$ 300.00 
• Subtotal$ 13,300.00 

• Minus: Personal use part ( 162 ÷ 180 × $13,300 ) $ 11,970.00 
• Subtotal$ 1,330.00 
• Plus: Capital cost allowance (business part only)$ 0.00 
• Plus: Amount carried forward from previous year$ 150.00 
• Subtotal$ 1,480.00
• Line1Minus: Net income (loss) after adjustments$ 7,100.00
• Line2 Business-use-of-home expenses available to carry forward (line 1 minus line 2) (if negative, enter “0”)$ 0.00 

• Allowable Claim (the lesser of line 1 or 2 above)$ 1,480.00

Remember, the amount you can deduct for business use of home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use these expenses to increase or create a business loss.

Again, I highly recommend using tax preparation software to file your self-employed tax return. These programs will search for eligible deductions and credits to find every tax break you qualify for. They will prompt you with step-by-step guidance to help you accurately complete your return.

Important Dates

Tax season is here again, and it’s time to dig out your receipts and gather your paperwork. April 30th is Tax Day for the majority of Canadians. This is the deadline to both pay any tax due and file your return.

This year, if you are self-employed you will have until June 15th to file. You must remember, if you owe taxes though, you will still need to pay them by April 30th to avoid penalties and interest. Self-employed Canadians would be wise to stick to the April 30th deadline to avoid any unexpected or costly surprises.

On the flip side, if you just can’t wait to get your hands on that refund, the Canada Revenue Agency (CRA) will officially start accepting electronic returns on Feb. 24th.

While anticipating a tax refund is a great motivator to file early, so is having a large tax bill. Early filing will give you an opportunity to plan how you will pay your tax owing or to arrange installment payments. The more you can pay by April 30th, the fewer penalties and interest you will accrue.

Oh, and don’t forget your RRSP! A good thing to remember is that you can put money into your registered retirement savings plan (RRSP) at any time throughout the year, but if you want to realize a tax benefit for your RRSP contribution with your current return, the cutoff for adding funds this year is March 2nd as March 1st will fall on a Sunday in 2020.

Important Information for Self-Employed Canadians

The trick to successful tax filing for self-employed individuals is to be prepared. Unless you have incorporated, you will only need to file one return. This return includes all of the expenses usually encountered such as applicable medical, dental and tuition expenses. Collect the basic information needed for you, your spouse and any dependants such as social insurance numbers and dates of birth.

Business Information

To complete your return you will need to provide some basic information about your business activities, income, and expenses. If your business has a name you will be asked to provide it, otherwise, you can just provide your name and address.

Income & Expenses

It is important to keep track of the income you receive from your self-employment activities. Gather any invoice copies, bank statements or other slips that show proof of income received. You will also need to fill out the correct industry code that matches your type of business. More information on Industry Codes from the CRA website can be found here.

It is important to note: If you are filing your return electronically, you will use the industry codes from your tax preparation software.

You only use the industry codes listed on the CRA site if you are filing your General Income Tax and Benefits Return on paper.

I highly recommend using tax preparation software to file your self-employed tax return. These programs will search for eligible deductions and credits to find every tax break you qualify for. They will prompt you with step-by-step guidance to help you accurately complete your return.

There are several great options for tax preparation software in Canada. These include TurboTax, UFile, and SimpleTax, to name a few. All offer free versions but the level of assistance and restrictions on the free versions usually don’t make sense for self-employed filers. You can claim the cost of tax preparation software as a business expense.

I use and recommend TurboTax. It is simple to understand, and with the paid versions, it has excellent customer support. Full disclosure, if you purchase through this link, I may receive an affiliate commission.

Expenses

Expense information is slightly more complicated. The type of expenses you claim are directly related to your particular business activities. The key point here is to be reasonable. The CRA only allows you to claim reasonable business expenses incurred for the purpose of earning income.

More information on business expenses from the CRA website can be found here.

It is important to understand and claim all of your business-related expenses. Here is a shortlist of the most common expenses for self-employed tax filers.

• Bank Fees
• Office Supplies
• Inventory
• Advertising
• Busines-Use-of-Home Expense
• Cell Phone
• Vehicle Expense

Again, if you are using a tax preparation software to file your taxes it will make capturing all of these expenses much easier. TurboTax has a Self-Employed version that has a live assist and review option available where a tax expert can answer your questions while you prepare your taxes. When you are ready to file they can review your return to make certain it is accurate and you are getting your maximum refund.

Regardless of how you choose to file, be sure to file on time. Plan to file your taxes in advance so that you don’t feel rushed and miss any tax-saving opportunities. If your taxes are complicated consider getting advice from a local tax professional. Yes, professional advice can be expensive, but not filing on time, or making mistakes can end up costing you more.