How the Self Employed Can Reduce Taxes

How can the self employed in Canada save taxes? The answer to this question can be daunting and difficult to understand. However, I’ve created a simple list of the Top 5 Tax Savings Strategies for self employed persons, which are listed below. I’m sure you’ll be very pleased with these tips, once you see how much you can save!

1. Home office expenses

If you’re self employed and work from home, you can deduct a portion of your household expenses. The portion of household expenses that can be deducted is determined by calculating the percentage that the size of your work space at home (e.g. home office) is of the total size of your home. For example, if your home office is 15% of the total square footage of your home, then 15% of the household expenses can be deducted. The following household expenses can be deducted: – Mortgage interest – Property taxes – Maintenance and repairs – Condo fees – Utilities (e.g. water, gas, electricity)

2. Pay salaries to family members

Self employed Canadians save taxes by paying family members a reasonable salary. This strategy works if you, as the self employed individual, are 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 $10,320 of employment income is tax free. If your children are not working, you can save taxes in Canada by paying your children $10,320 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 wage or 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 there’s a bona-fide relationship between yourself and your family members, that will help refute any challenges by the Canada Revenue Agency.

3. Lease a vehicle – save taxes for the self employed in Canada

Self employed Canadians can save taxes by leasing a vehicle for their business. The following vehicle costs can be deducted for tax purposes: – Repairs and maintenance – Fuel – Insurance – Toll charges – Parking – License and registration – Lease charges The maximum monthly lease amount that can be deducted is $800 + taxes. Anything over and above this limit is non-deductible. The percentage of the vehicle operating costs that can be deducted is calculated as: (Total KM’s Driven for business purposes / Total KM’s Driven in the year) x 100 For example, if you drove 12,000KM for business purposes during the year and 20,000KM in total, then 60% of your vehicle operating costs can be deducted. To substantiate the KM’s that you drove for business you must keep a daily log.

4. Keep accurate books

How can accurate books and records help the self employed in Canada save taxes? The answer is that accurate books and records ensure that all expenses are captured on your business’ financial statements and personal tax return. This way, nothing is missed. The best way to keep accurate books and records is to purchase an accounting software program such as QuickBooks or Simply Accounting. For very small businesses, a spreadsheet can also be used to record business expenses.

5. Incorporate – to save self employed taxes in Canada

By incorporating your company, your business profits will be subject to a very low tax rate of 16.5%. On the other hand, the business profits of unincorporated businesses are included in the owner’s taxable income, which are taxed at 46.4% (the highest income tax bracket). For additional information about incorporating your small business, please see our FAQ on Incorporating Small Business

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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