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How to save taxes for self employed in Canada?

How to save taxes for self employed in Canada? The answer to this question can be daunting and difficult to understand.

However, I’ve created a simple list of  my Top 8 Tax Savings Strategies on how to save taxes for the self employed in Canada. 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.

Self EmployedFor example, Charles is an accountant and works out of his own home. His office space takes up 700 square feet of his 2800 square foot house (25%). If Charles has office related expenses that total $25,000 during the year he can deduct $6,250($25,000 x 25%)

The following household expenses can be deducted:

- Mortgage interest

- Property taxes

- Maintenance and repairs

- Condo fees

- Utilities (e.g. water, gas, electricity)

It is important that you do not claim dual purpose rooms such as a bedroom. 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. Rooms such as the kitchen or bedroom cannot be claimed.

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. It is important that you don’t make too much of your home a part of your office as it will not be eligible for the principal residence exemption. In my experience I would say 15%-35% is a fare estimate of square footage used in your home as office space.

This is just one way on how to save taxes for self employed in Canada. Let’s take a look at our next strategy.

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 $11,038 of employment income is tax free. If your children are not working, you can save taxes in Canada by paying your children $11,038 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.

Let’s illustrate an example of how income splitting can save taxes for self employed in Canada. Stephan and Amanda are married and have two kids, Kristie and Rebecca. Stephan is a lawyer and runs his own business which has profits of $150,000 for the year. The following examples show the tax savings that are possible for Stephan and his family through income splitting.

Scenario 1: Stephan is the sole income earner in the business
As the only family member working in his business, Stephan would be taxed at the highest marginal tax rate in Canada of 46.41%. Stephan’s tax owing for the year would be $69,615 approximately (150,000 x 46.41%).

Scenario 2: Stephan, Amanda, Kristie and Rebecca all have jobs in the business
In order to take advantage of income splitting, Stephan hires his wife Amanda to work as the office administrator and gets Rebecca and Kristie to do important research before cases. Stephan can now pay his wife and kids a salary based on the work they performed. If Stephan was to pay his wife $50,000 and two kids $15,000 each, then Stephan would have left over income of $70,000 for himself. Stephan’s family tax rates would be as follows:

Family Member

Salary ($)

Tax Rate (%)

Taxable Income ($)

Stephan

70,000

32.98

23,086

Amanda

50,000

31.15

15,575

Kristie

15,000

20.05

3,007.50

Rebecca

15,000

20.05

3,007.50

Total

$44,676

Bottom line: income splitting has allowed Stephan to save $24,939 on taxes this year.

For more tax information on this subject check out this article on how to save taxes for self employed in Canada.

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

How to save tax for self employed in Canada

Did you know that many of your daily car expenses are tax deductible when used for business

Canadians who own their own business 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. The daily log should include:

- Date of trip

- Location of trip

- KMs driven during trip

- Purpose of trip

You can maintain a daily log on your own or there are many free log book apps that you can download on your mobile device. Visit Google play or the App Store to download your copy.

4. Keep accurate books

How can accurate books and records help save taxes for self employed in Canada? 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 taxes for self employed in Canada

By incorporating your company, your business profits will be subject to a very low tax rate of 15.5%(2013). On the other hand, the business profits of unincorporated businesses are included in the owner’s taxable income, which are taxed at 49.53% (the highest income tax bracket).

Incorporating your company you will also open yourself to more tax saving opportunities through income splitting. As mentioned earlier income splitting is a major way to save taxes for self employed in Canada.

When a corporation is formed shareholders are needed. A major benefit to being a shareholder of a company is the payment of dividends. Typically a corporation will declare dividends on after tax profits once a year. If you were to make your spouse a shareholder in your company then it would be fair to pay them a dividend. This can be advantageous for saving tax when one spouse earns significantly more than the other. The higher income spouse can pay an appropriate dividend to the lower income spouse through the corporation, so that the income will be taxed at a lower marginal rate.

It is important that you do not make kids under 18 a shareholder in your corporation. To avoid families from taking advantage of splitting income through their children, the CRA introduced what is known as the “kiddie tax” rule. If you issue a dividend to a minor (under 18) then they become taxable at the highest federal tax rate and not eligible for any tax deductions. Now there is no incentive to income split with your children through dividends as it ends up penalizing you with more taxes.

For additional information about incorporating your small business, please see our FAQ on things you should know before incorporating.

6. Individual Pension Plan (IPP)

For individuals who are higher income earners, you may want to invest in an Individual Pensions Plan (IPP). Unlike a Registered Retirement Saving Plans (RRSP), an IPP will allow you to continue living a high income lifestyle upon retirement.

An IPP is a defined-benefit pension plan that is registered with the provincial government as well as the CRA. Defined-benefit pension plans will provide the investor with a specified monthly benefit. This will be distributed to you upon retirement. The amount is predetermined by a formula based on factors which include:

- Employee earning history (T4)
- Tenure of service and age

The annual contribution amount of the IPP is established by an actuary. Since contribution amounts are more expensive they tend to produce greater returns than an RRSP.

Along with greater returns an IPP will save you on taxes. Contributions made are tax deductible by the employer. However being self employed in Canada means you are financing your own policy. Another major plus, is that you will not be taxed on your earned income until it is withdrawn.

For more information on what an IPP is and how it can save taxes for self employed in Canada check out this Scotiabank article on Individual Pension Plans.

7.) Health and Welfare Trust

Another way on how to save taxes for self employed in Canada is through a health and welfare trust. This trust is a tax free vehicle used for corporations to finance its employees’ health care expenses. This can be used by self employed individuals who have incorporated their own business.

The first step to establishing a Health & Welfare Trust is setting up a bank account exclusively for the purpose of health care spending. It must however abide by the CRA guidelines as follows:

a.) Funds cannot be personally used by the employer or used for any other purpose than health and welfare expenses.
b.) Funds contributed to the trust must equal the amount required for the benefit, no more.
c.) Once you have rendered payment terms they cannot be changed during the year.
d.) Withdrawals from the trust must meet the criteria of medical expenses defined by the Canadian tax act section 118.2(2).

By setting up a health and welfare fund you can also take advantage of two key tax savings for self employed individuals.

1.) Contributions made into the trust are tax deductible on your corporate return.
2.) When the trust is used for a medical expense, funds can be withdrawn on a tax free basis.

Thus when you withdraw money from the trust it will not be considered income for tax purposes. Another major advantage of this form of saving is employees can submit medical claims for their dependents.

8.) Multiplying the Small Business Deduction

Another potential tax saving tip for self employed Canadians is multiplying the small business deduction. In Canada, Canadian Controlled Private Corporations (CCPC) will pay federal tax of 11% on its first $500,000 of active business income as opposed to 17%.

This deduction is a major way to save taxes for self employed in Canada. The Canada Revenue Agency realizes how vital this deduction is and has association rules in place to prevent self employed business owners from claiming multiple small business deductions. Under section 256(1) (a-e) of the income tax act you will find a list of associated corporation rules. These rules make it difficult for multiple small business deductions to be claimed by more than one corporation.

a.) Paragraph 256(1)(a): one corporation controls the other:

How to save taxes for self employed in Canada

If your corporation has already used up your small business deduction setting up a new corporation will not work if it is owned by your existing corporation. In the example above if Corporation A has used up its small business deduction. Corporation B is established by Mr. X and sells the majority of its equity to Corporation A. Since Mr. X is the owner of corporation A and is the majority shareholder thus he is the majority owner of corporation B. He will therefore not qualify for multiple small business deductions with both of theses companies.

b.) Paragraph 256(1)(b): Both corporations are controlled by the same person or group of persons:

How to save tax for self employed in Canada

In this example we have a husband trying to get another small business deduction by making his wife a shareholder in his new corporation. However section 256(1)(b) does not allow this. Since Mr. and Mrs. X are considered related persons according to the CRA only one small business deduction will be allowed for both corporations

Tax Tip: If your wife owned 100% of Corporation B and you owned 100% of corporation A then both corporations could qualify for two small business deductions.

c.) Paragraph 256(1)(c): Each corporation is controlled by a person which are related and one owns at least 25% of the issued shares in any class of capital stock in each corporation:

How to save taxes for self employed in Canada

Above we have a similar situation to the example shown in part b. However this time Mrs. X owns a majority share in one of the corporations. Many of you may think that since Mr. X is not the owner of Corporation B theses companies should not be associated. Since Mr. and Mrs. X are married they are considered related parties. Thus under section 256(1)(c) related parties cannot own more than 25% of the shares in each others companies.

Tax Tip: You can take advantage of multiple small business deductions in this situation if Mr. was to own less than 25% of Corporation B’s shares.

d.) Paragraph 256(1)(d): One corporation is controlled by a person and another by a group of people. If the individual is related is related to everyone in the group and owns no less than 25% of the issued shares in the other corporation they are considered associated:

How to save taxes for self employed in Canada

Under this situation Corporation A is associated to Corporation B because Mr. X owns at least 25% of the shares and is the husband and father of Corporation B owners.

Tax Tip: If Mr. X owned less than 25% of the shares in Corporation B then both corporations could have a small business deduction. Furthermore if another owner was added to Corporation B say one of Mr. X’s friends then the association rules would not apply and Mr. X could own as much stake in Corporation B as he wanted.

e.) Paragraph 256(1)(e): Each corporation is controlled by a related group where each member of one group is related to all the members of the other group. In this situation if one of the groups owns over 25% of the shares in the other group they are considered associated:

How to save taxes for self employed in Canada

In this last scenario both corporations are owned by a group which is considered related. Since everyone in Corporation A is related to everyone in Corporation B then the companies are considered connected. If however Corporation A owned less than 25% in B then they would not be connected and could qualify for 2 small business deductions.


About the Author – Allan Madan

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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How to save taxes for self employed in Canada? was last modified: November 3rd, 2014 by superAmin
This entry was posted in Corporate and business tax and tagged , , , , , . Bookmark the permalink.

About the author

is a Chartered Accountant, CPA and Tax Expert and enjoys working with business owners, individuals and entrepreneurs.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

79 Responses to How to save taxes for self employed in Canada?

  1. Gurpreet Singh says:

    I am interested to open a company for self employment and trading . Please Guide your charges.

    • superAmin says:

      Hi Gurpreet,

      Thank you for your inquiry.

      We will be more than glad to assist in in opening a corporation.

      This will include the following:

      -Articles of Incorporation
      -Corporate By-Laws
      -Minute Book
      -Share Certificates
      -Determination of Shareholders,
      -Director’s Resolution for appointment of Directors and Officers
      -Detailed Tax Plan to minimize corporate and personal tax (integrated with the incorporation documents)
      –We will also guide you with the income splitting process

      You may feel free to contact us at the contact details provided in our contact page.

      Thank you !

      -The Team at Madan CA

  2. Vanessa says:

    Very Interesting article. learned a lot

  3. Trina says:

    I spoke to my accountant and he mentioned I should work on getting better internal controls. I was wondering how this will help me save money?

    • superAmin says:

      By having appropriate internal controls it will allow accountants to look at other areas and not have to fix journal entries that may be incorrect. This can add additional time and as such increase your accounting costs. By having weak internal controls income could be wrongly stated leading to a CRA review and penalties added on to your cost.

  4. James says:

    Just curious as to what other benefits incorporating my business will have I hear about a small business deduction available to certain businesses?

    • superAmin says:

      Yes James. If you set up a CCPC you will be able to claim a small business deduction. This deductions reduces your taxable income rate to 11% on your first $500,000 of taxable income

      Thanks

      Allan

  5. Shellby says:

    Hi there just wondering how long the CRA has to audit previous years tax returns. I keep a certain amount of money aside in case I have reported something wrong and was wondering if I can now use that money for my businesses.

    Thanks

    • superAmin says:

      Hi Shellby,

      The CRA may audit your return up to three years back. However, if there was found to be an error in your return or omission made out of neglect, carelessness or willful default, the CRA can audit your return as far back as possible.

      Thanks

      Allan

  6. Tina says:

    I’m spending $450 a month on a dog walker, plus another $100 for food. Not to mention vet fees which can costs up to $500 sometimes. Is it possible to claim any of these expenses on my business or personal tax return? I sure could use some relief.

    thanks

    • superAmin says:

      Hi Tina,

      As a fellow pet owner, I agree it would be great to have a tax deduction for expenses related to pets. Unfortunately, costs related to maintain an animal are not tax deductible. The only exception is if the animal was assisting someone with special needs, such a guide dog for someone who is blind. Then all the expenses can be deducted,

      Thanks

      Allan

  7. Adel says:

    So after reading tip 8 the CRA will allow you to create two separate corporations and as long as each is owned 100% by the husband or wife they will both be eligible for two small business deductions? Is my logic correct?

    Thanks

    • superAmin says:

      Yes you are. If you and your husband each own separate corporations and don’t have any controlling interest in each others than you are both entitled to a small business deduction.

      Thanks

      Allan Madan

  8. Chris says:

    Hi,
    I run my own snow removal business and purchased a new blower in 2013.I was wondering how would I file this on my tax return as a business expense or capital asset?

    Thanks

    • superAmin says:

      Hi Chris,

      The purchase of your snow blower will classify as a capital asset not a business expense. Thus you will need to capitalize it at the given CCA rate. The snow blower would classify under Class 8 or if the snow blower was under 500 dollars, Class 12. You can find more information on the rates through this CRA bulletin.

  9. Matt says:

    Hi there,

    By incorporating, if I am a day trader, I may treat the gains from the stock as Business Income rather than Capital Gains right?

    • superAmin says:

      Hi Matt,

      Day traders may be considered to be carrying on a business. The CRA examines several factors to assess whether a business is being conducted including:

      1) Frequency of trades
      2) Expenses incurred
      3) Length of ownership
      4) Intention to earn profit through ‘quick flips’

      Canadian controlled private corporations in Canada can claim the small business deduction and pay a low rate of tax on business income.

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  10. jarek says:

    Hi, How do you claim purchase a a cell that is use for the business, don’t see anything under business expenses for it.

    • superAmin says:

      Hi Jarek,

      Smart phones (such as the I-phone) are included in Class 50 of the CCA schedules, and are depreciated at a rate of 55% annually. In the year of purchase, only half of the depreciation amount for the year can be claimed.

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  11. Justin says:

    I’m a doctor due to work in next few months in Toronto for a period between 12-18 months. I request if you could set up a self employment company for me to be able to save as my wife won’t be working during this period..(for a fee of course)?!
    Cheers

    • superAmin says:

      Hi Justin,

      Medical doctors can open professional corporations in Ontario only if they are permanent residents of Canada, or Canadian Citizens. Are you a PR Card holder or a Canadian citizen?

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  12. Jim Root says:

    I’m thinking of starting up a new PC repair business with my wife, and have an accounting question. How do I choose the right year-end for my business?

    - Jim

    • superAmin says:

      Hello Jim. Thanks for your question.

      Choosing a year-end for your business can be a tricky subject. These days, all proprietorships and partnerships must report income on a calendar-year basis for tax purposes. If you should choose a non-calendar year date for your year-end, you’ll have to adjust your business income each year to reflect a December 31 year-end.

      Since you have to report your income as though you have a calendar-year end anyway, it may not be worth the hassle to choose a non-calendar year end. Also, because this is a somewhat complex matter, I recommend that you speak with me for further details.

      Regards,
      Allan Madan and Team

  13. Jerome Crewson says:

    Hello Allan. I’m a carpenter that has just opened his own business. When is the deadline to file my tax return this year? Am I still liable for late-filing penalties? What form do you need to complete? If I operated at a loss, do I still file?

    • amadan says:

      As the usual day for filing the self-employed tax return falls on a Sunday, the date for filing has been extended to Monday, Jun 16, 2014. Though you are exempt from late-filing penalties, you are liable for interest or any taxes you owe to the CRA as of the filing deadline. If you aren’t incorporated, you need to fill out a T2125 form as part of your personal tax return to include business revenue and expenses.

      If your business operated at a loss for 2014, it is still important to file a T2125 form to show your activities. Some of these losses may be able to be deducted from employment income. Though you are not expected to see a positive cash flow in the first year, the CRA will want to see that you have a plan

      for generating income.

  14. Rackham George says:

    My wife is going back to work, and we are thinking of hiring a live-in nanny. I understand the nanny would be an employee, and I would I be responsible for CPP, EI, and tax remittances. Would we need to submit a business return? Could we submit other expenses for the nanny other than childcare amounts?

    • amadan says:

      Hello Rackham,

      You don’t need to file a business return if you employ a nanny. However, this means you cannot deduct expenses. You just need to file a T4 return to record your nanny’s income and deductions with the Canada Revenue Agency. You can file more details at the CRA’s website: http://www.cra-arc.gc.ca/esrvc-srvce/rf/t4/menu-eng.html. Since your nanny is renting a space in your home, you can deduct rental expenses to offset the rental income earned from renting space to your nanny.

      If you children are born in 2007 or later, you can claim $7,000 dollars. If they are born from 1997 to 2006, you can claim $4,000. When claiming, the tax deduction is applied to the lower income spouse.

      Regards, Allan Madan and Team

  15. Veronica Santiago says:

    Hey Allan, I am about to open my own catering business. How do CPP plan payments work when you’re self-employed?

    • amadan says:

      Hello. If you are self-employed, you are required to pay both employer and employee portion of CPP/QPP contributions to a maximum. For 2014, the maximum will be increased to $2,425.50. If you’re paying both the employee and employer portions, your maximum will be $4,851. Self-employed individuals can claim a deduction on line 22 of the T1 for the portion of CPP or QPP contributions that represents the employer’s share (one-half of contributions made). Only the portion of CPP or QPP contributions that represent the employee portion qualify for the 15% federal non-refundable tax credit. Regards, Allan Madan and Team

  16. Yao says:

    Hello Allan. I started an online business last year in my home. I make jewelry, clothing, as well as other merchandise. In total, I made about $25,000 in gross sales. Should I claim this on my personal taxes, or is there a way I can claim these expenses that won’t put me in a higher tax bracket? What forms will I need to fill out?

    • amadan says:

      Hello.

      Unless your business is a corporation, the income earned by the business is inseparable from your personal income. This is because as a sole proprietor, the government sees the business as an extension of you. When you fill out your tax return, you will be able to deduct business expenses (these have to be reasonable) to reduce your taxable income. If you are thinking of incorporating your business, make sure you understand both the risks and the steps involved. The form you’re looking for is a Form T2125, Statement of Business or Professional Activities. You can find it at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/t2125/menu-eng.html?=slnk.

      Regards,
      Allan Madan and Team

  17. Camille Michel says:

    Hi Allan,

    I have recently arrived in Canada on a work permit. I have secured a short term employment contract with IBM over the summer. The contract will only last 2-3 months, and I will leave Canada after that time. What is the best business structure to enable payment of the contract? Should I incorporate? I would like to minimize the paperwork, if possible. I will be completing the job remotely from Canada for a US based company, so I will be paid in USD.

    • superAmin says:

      Hello Camille.

      First, I’d make sure that you’re self-employed, and not an employee. This is because contractors can claim deductions that employees cannot. As a contractor, you should be able to work when, where, and how you want. For more information, please visit the CRA at http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-e.html#employee_selfemployed. Because of the location of the billing, you may be able to claim an exemption for paying HST/GST.

      In terms of business structure, it makes the most sense to operate as a sole-proprietorship. Based on the short amount of time you are here, a partnership and corporation would take too long to set up. Also, there would be a lot of paperwork required, which you stated that you want to avoid. If you want to want to do consulting on a full time business, you can talk to an expert in your host country when you return.

      Regards,
      Allan Madan and Team

  18. Ute says:

    Incredible points. Great arguments. Keep up the great work.

    Feel free to surf to my web blog :: CPA Profit Secrets

  19. gupta says:

    Hi Allan, I opened the incorporation, just wondering how can I claim my car expenses !! Car is second hand I bought its under my name though !!
    Any suggestions?

  20. masoud says:

    Hello Allan
    I just started a cleaning business with my partner as partnership we registered in feb . We also registered gst. When should we file gst. As whats deadline Should we do ourselves if so how. And what about income for self employment whats deadline to file. And whick kind of spreadsheet we can use to record business expenses thanks

    • superAmin says:

      Hi Masoud,

      Thanks for the question. The reporting period will be annual for HST purposes, which means you have to file the HST return only once a year. The HST payment is due April 30, but the HST return must be filed by no later than June 15.

      Your personal tax return (since you are self employed) must be filed by no later than June 15, but any income taxes owing must be paid by April 30.

      You can track your income, expenses, assets and liabilities in an accounting program, such as Wave Accounting. On my website, I have free online video tutorials that show you how to use Wave Accounting http://madanca.com/services/accounting/bookkeeping/

      Thank You,

  21. Alexa says:

    Hi Allan, thanks for really helpful post. I opened a corporation that earned little income while made significant expenses during this first year. I spent earnings from my income that i got through a T4 employment. Can i claim self-employed expenses to deduct my taxes from t4 earnings? Should i list the name of corporation under “name” or my name while filing self employed taxes. Thanks in advance.

    • superAmin says:

      Hi Alexa,

      If the corporation paid for the business expenses from its bank account, and/or if the purchase-invoices were addressed to the corporation, then the corporation must write-off the business expenses. You cannot arbitrarily allocate business expenses to the corporation and yourself. The basic rule is: The person (or corporation) that is legally liable to pay for the expense can write-off that expense.

      Many new entrepreneurs operate as sole proprietors (i.e. not incorporated) so that they can claim a business loss on their personal tax return and offset the business loss against other sources of personal income, such as employment income. This means that the purchase-invoices should be addressed to the sole-proprietorship, and contracts should be entered into by the sole-proprietorship.

      Thanks,

      Allan Madan, CPA, CA

  22. John says:

    Hi Allan:
    Thanks for providing this most insightful information. I currently have a corporation that has been sitting idle. In fact, unless I do something with it before April the government has informed me it will cease to exist. I will be changing my line of work to self employment right away, and am wondering what your thoughts are on using the corporation I already have or simply running as a self employed person. I know the accounting end is a lot more involved with the corporation. I would expect the annual income to be in the $100,000.00 to $150,000.00 range in the first year.

    Thanks
    John

    • superAmin says:

      Hi John,

      There are many benefits of incorporating your business as opposed to running as a sole-proprietor. These would include tax deferral, income splitting through dividends, limited liability protection, and lower corporate tax rates.

      Tax Deferral: You can defer tax using the Small Business Deduction which is an annual tax credit that is 16% of the corporations business income for the year up to a maximum of $500,000. This is done by retaining some of the income in the corporation so it is taxed at a lower rate than if earned personally. The remaining tax is deferred until dividends are paid.

      Corporate Tax Rates: A corporation is a separate tax payer with its own tax rates. The benefit of incorporating would be the lower tax rate. The corporate tax rate in Ontario is 15.5% whereas the marginal tax rate for a sole proprietor would be 46.4%.

      Income Splitting: This allows spouse and adult children to subscribe for shares of the corporation and receive any dividends from profit. The ability to have the dividends taxed between more than one person means that the overall tax rate on the dividends would be lower as opposed to if one person was taxed for al of them.

      Limited Liability Protection: The limited liability protection means that the shareholders of a corporation are not liable for the corporation’s debts. For example, if the corporation goes bankrupt, the shareholder will not lose more than their investment within the company.

  23. Monica says:

    Hello,
    I am a self-employed and work from home. I have 3 rooms and one of them is my work space. I wonder if I can claim this room as Home Office Expenses even though I signed this house as a residential only (not business purpose) when we bought it. Thanks!

    • superAmin says:

      For your room in your house to be considered as a work space, you need to meet one of the following criteria.

      1. Room must be the principal place of business. That is, you use that space more than 50% of the time and it is your main place of work, or

      2. The room must be used exclusively to earn business income AND to meet clients on a regular and continuous basis. It is implying here that firstly, you need to use the room in your house for a business and nothing else. The second part of the second criteria is pointing out that clients or customer must be met on regularly on a continuous basis. This will entirely depend on the nature of the business activity you undertake. Unlike the first criteria, the second criteria needs both parts to be satisfied to be considered a work space.

      If the above criteria is met, some work space expenses can be deductible. There are some criteria associated with this as well to determine eligibility.

      First, your contract of employment must specify that it is you who pay the home office expenses such as rent, salary or supplies.

      Second, you should not be reimbursed or be entitled to for the expenses you incur for your work space. If you are reimbursed, it would be a taxable benefit on your tax return.The expenses you incur must be reasonable for you to earn income and supplies bought must be used only for the performance of duties in the work space. But there is a limitation on the expenses that you can claim for deduction. You cannot deduct more expenses than income earned from the business to create or increase a loss on your income tax return.

      Expenses that you were not able to claimed during the current year for deduction can be carried forward to the following year and be considered expenses incurred in that year. The work space criteria will still need to be met each year for expenses to be deductible. Therefore, expenses can be carried forward indefinitely as long as the room in your house meet the requirements for a work space.

      Allan Madan

  24. Deborah Kennedy says:

    Hello Allan I have a question and would appreciate if you could answer for me
    I started a small retail shop in 2013, Nov.I am the sole proprietor. .I live commonlaw and my spouse wants to do income splitting.for 2014.He would be the higher income earner .Is this possible?.I am not very profitable..just covering my expenses as it has only been 1 year, so I will most likely see a return for my personal/company and am not sure if I want to give those monies up

    • superAmin says:

      Hi Deborah,

      No, the percentage of shares that the owners have in the business are the only one eligible to split the income.
      The incentives for income splitting is due to reducing your marginal tax bracket. Therefore it may be more beneficial to offset your business income against other sources of income on your personal tax return.

  25. Priyunk says:

    Hello Madan,
    I have recently incorporated and opened a company. I made myself and my wife as Directors of the incorporation. What are the various things I should start doing? What bills/receipts I should be putting aside?
    Can we use personal Credit/Debit cards for the expenses or do we need Business Account and Credit card?

    • superAmin says:

      Hi Priyunk

      First and foremost, we highly encourage you to consult a tax professional to create a tax plan for you and your family. A good tax professional will take the time to understand your goals and objectives and plan your compensation/savings strategies to achieve that goal.

      Secondly, you should open a corporate bank account and try to obtain a corporate credit card (it may not be available immediately as the bank may want to see credit history). To the best of your abilities, corporate expenses should be paid using corporate funds and not personal funds.

      Third, you should familiarize yourself with a bookkeeping software to keep track of the company’s activities including its income and expenses. We recommend Wave accounting if your business will have small amount of activities throughout the year. It is a fairly simple software which can produce all the statements needed to file taxes with the CRA.

      Lastly, you should be aware that the Corporate tax return is due 6 months after the year end (payment is due 3 months after the year end) and the GST/HST return, if applicable, is due 3 months after the year end (payment due at the same time). You should also find out if your province has a separate sales tax component.

  26. Sam says:

    Hi,
    I quit as a regular employee and started my own company (INC.) in Aug 2014. I got paid as a contractor from Sep onwards of the same year but have not withdrawn any funds from my business acc during the FY 2014. Should I mention the business income while filing my personal IT return for the year 2014? Does it impact my personal income taxes for the FY 2014 in any way?
    Thanks

    • superAmin says:

      Hi Sam,

      Assuming that you have incorporated your own company, any income earned by the company would be reported on the corporation’s corporate tax return (T2), rather than on your personal tax return T1.

      Depending on how you subsequently structure your compensation (for instance, salary versus dividend payments from your corporation), your earnings will be classified accordingly on your personal tax return.

      Please let us know if you have any further questions.

  27. Monica says:

    Hi Allan,

    If I stay at a friend’s place…..basement and pay rent can I use a portion of the basement space as office and use as tax writeoff ?? I have an incorporated business.

    Thanks Allan !!

    • superAmin says:

      You are mentioning that your business is established as a corporation. Expenses deducted for corporate establishments forego deductions that you would benefit on your personal tax return.
      If you are using the portion of the basement in order to earn income the rent is considered as an expense to run your business. In addition, there are further home expenses that you may deduct a portion of that you can find on the CRA website provided below.

      List of eligible business use of home expense part 8 – http://www.cra-arc.gc.ca/E/pbg/tf/t2125/t2125-14e.pdf

      In order to qualify for a home office deduction, it is only available if you are self-employed or you get a form from your employer (Form T2200, Declaration of Conditions of Employment) that states you must work at home and keep an office. The CRA also requires you meet one of the following conditions:

      1. Your home must be your primary place of business. That is, you conduct business in your home more than half of the time.
      2. You meet clients, customers or patients in your home and as a result, you earn business income from your home.

  28. Vivian says:

    Hi Allan,

    I have two jobs. For one, I am allowed to claim employment expenses, for the other I can claim expenses as a self employed (home office expense ). My question is if I claimed the internet, cellphone expense for my employment expenses, can I still claim them ( internet, cellphone ) in my self employed job as they are considered different jobs.
    Thank you.

    • superAmin says:

      Hi Vivian,

      You cannot claim the same expenses twice. I recommend that you apportion the home office expenses between your employment and business based on the % of time that you spend on each.

  29. Jason says:

    My business in incorporated and I’m going to be paying myself dividends. But what percentage of my income should I be putting aside for taxes?

    • superAmin says:

      Hi Jason,

      Presuming your company is CCPC and you issue non-eligible dividends( small business dividends) . Please see the following example of calculation of the taxes payable on small business dividends for tax payers in the lowest tax brackets:-
      Estimated marginal tax rate:- Combined federal + Ontario tax rate = 20.05%
      Non-eligible Dividends issued for enhanced DTC = $ 30,000
      Grossed-up taxable dividend @ 18% = $35,400 (Included in tax return)
      Federal + Ontario taxes@ 20.05% of $35400 = $7097.7
      Less: DTC (Dividend Tax credit) Federal @11.017% of $35400 =( $3900)
      DTC (Dividend Tax credit ) Ontario @ 4.50% of $ 35400 = ($1593)
      Net tax payable on dividends = $ 1604

      Marginal Tax rate shown above is an estimated percentage. Your Marginal Tax rate is subject to change depending on your total taxable income. We don’t know your taxable income to give you the accurate tax rate and taxes payable.

  30. Bob says:

    Hi Allen,
    I am retired and work from home as consultant.. I earn income from home office. I understand I can claim home maintenance expenses in proportion of space used for office. My question is Can I include a portion of the cost of purchase of a snow blower and a new dish washer as a part of home maintenance expense

    • superAmin says:

      Hi Bob,

      If the expenses you paid were to maintain the work space only then you may be able to deduct all or most of them for example roofing of the house done then you can claim proportion as home maintenance expense based on the home office floor area but the cost of snow blower and new dish washer are not allowed to be deducted as home maintenance expense.

  31. Martin Tierney says:

    Hi Allan,

    Great information. I am a medical doctor who works in the hospital. The corporation I work for takes %5 overhead from my pay . How can I claim this overhead as I do not have a clear idea as to what the overhead goes towards?

    Many thanks for your time,
    Martin

    • superAmin says:

      Hi Martin,

      Since we do not have your employment agreement to advise you. As a general note please refer to the following.

      If the corporation that you work for gives you a tax slip with net income (after 5% overhead pay), you will only report the income and do not report the overhead.

      If the corporation that you work for gives you a tax slip with gross income, you will report the income and expense the overhead in your income taxes.

      Reporting of income again depends on the employment arrangement, if you were to get income without deducting the source deductions, you will report in schedule 2125 and also report the expenses as per above in the same schedule.

      If you were to get salaried income, with source deductions for CPP, EI and Taxes taken out, then you will receive the T4 slip and you report this T4 slip. Also you will ask for T2200 form from employer to have you deduct the overhead under employment expenses in Form T777.

      Thank you,

  32. Anna says:

    Hi Allan,
    I am setting up a small website business in Canada (I am a Canadian citizen). However, my dad, who is NOT a Canadian citizen, does some work for me (IT, as a freelancer). Can I write his work as a business expense? And if yes, would an invoice from him be sufficient?
    Thank you,
    Anna

    • superAmin says:

      Hi Anna,

      CRA has a rule where the expense paid by you to the freelancer (your father) must be reasonable. It cannot be too high nor too low. A reasonable amount would be the average price offered by the local freelancer.
      We will need more information as to what type of service does your website business provide. The expense can only be deducted if it is necessary in order for you to earn business income.
      The Canada Revenue Agency (CRA) has been asked several times to comment on whether the expenses incurred to develop a website are capital or current in nature. In their responses, the CRA has consistently noted that a website is comprised of several different components, and that the underlying nature of each of these components must be analyzed separately to determine their appropriate tax treatment.

      The labour or consulting fees relating to acquisition or development of software to build the website functions would generally be considered capital in nature. However, if costs incurred do not relate to purchase, development of website or were not incurred for the purpose of altering the stucture of the website, these costs would be classified as business expense. Example is an expense paid to consultants to update existing website content. Also, periodic fees paid to web-hosting companies for hosting a website can be classified as a current expense on income statement.

      If the work done by your father meets the criteria of a either a current or capital expenditure, you will need the invoice to keep in your records. This is because if CRA audit you, they will ask for all relevant information and the invoice is needed.

      If you require more information, you can contact us for a 30 mins consultation and we can guide you with this.

  33. Gulzar says:

    Than you, This is a great learning article for me. My wife runs a Home daycare. is there any advantage to be incorporate her business. thanks in advance.

  34. Mike says:

    Hello

    I have full time job and I opened consulting firm last year. I have one room at my home which I used as office (around 10-12 %), is it usual percentage for home office? I also have another question regarding to my wife, she has worked for my business last year, I paid her but I don’t have T4 for her, can I claim his salary (its around 5k) as paid salary? if yes, what type of income she should report? could be other income? Thanks
    Mike

    • superAmin says:

      Hi Mike,

      Determining the home office allocation is calculated by the total number of square feet used for home office divided by total number of square feet of your house.

      In addition, if you have paid a salary to your wife, you are required to issue a T4 slip by end of February. Furthermore, you required to withhold federal income tax and CPP payments from your wife’s payroll.

      Your wife would report this income as employment income under her personal tax return.

      Best Regards,

  35. Jason says:

    Do I have to capitalize a smartphone I have purchases for solely business purposes or am I able to expense it in the year?

    • superAmin says:

      Hi Jason,

      You have to capitalize it, as a class 50 asset. It’s like a computer. The depreciation rate is 55% per year on a declining balance scale. Only 1/2 of the depreciation is allowed to be deducted in the year of purchase.

      Best Regards,

  36. Michael says:

    I’m from a small village in eastern Ontario. My Mother & I are opening a Pizza resaurant on the whole first floor of our home (it’s already an existing diner, tables, full kitchen, ect.) so we can’t claim any of that, it was already there. We are starting fresh.

    - We are not going corporate.

    - She’s currently a sole-proprietorship, we’re not sure if we should become a partnership yet, although I’m working here full time without pay until we can sort our stuff out.

    - What about taxes? It’s estimated that the business will make about 70-100k. My father is trying to convince me that you just hand in the 13%HST at the end of each quater and you’ll be fine, i’ve argued with him over such a claim.

    - What will we be charged in taxes? Considering half of our house is our business surely we’ll have our fair share of write-offs. Property taxes, hydro, ect.

    - … Can’t forget the CPP, how much of our income goes to them? I heard that if you’re self-employed you hav to pay the full ammount of 9.9%! God help me.

    As you can see, we’re currently in a bit of a pickle and desperate for advice. I plan on hiring an accountant, yes, but I wanted to hear what you had to say first.

    Thanks

    • superAmin says:

      Hi Michael,

      If you’re working from home, and your home workspace is your primary place of business, you can write off costs related to your home workspace:

      - utilities
      - mortgage interest
      - home insurance
      - property taxes
      - alarm fees
      - repairs

      The above expenses must be pro-rated by the size of the home workspace divided by the size of your home. If your pizzeria takes up 1 floor of 3 total floors in the home, then 33% of the above costs can be deducted.

      You must also set aside a portion of your profit so that you can pay your income tax bill. Income taxes for self employed persons must be paid by April 30, but the tax filing is not due until June 15. If you plan on making a profit of $100,000 the estimated income tax bill will be approximately $26,000. HST collected on sales collected should be kept aside, as this money belongs to the CRA, and not the business owner.

      Best Regards,

  37. Amir says:

    Hi Allan,

    I’m currently self-employed and I claim a portion of the rent I pay and other house hold expenses. I’m thinking to incorporate myself. Since the lease agreement in under my name and not the corporation, I’m wondering if I still will be able to claim the rent and other bills as my business expenses.
    Thanks

    • superAmin says:

      Hi Amir,

      You can charge back a reasonable portion of your house expenses to your corporation as “rent”. Remember to include the rent received from your corporation on form T776 of your T1 Personal Tax Return. The rent received is income to you. You can write off your house expenses related to your home office on form T776, which will reduce the net profit from the rents received.

  38. Susan says:

    Hi!

    I have yet to submit my (and my spouse’s) tax return, myself being self-employed (sole proprietor) and my husband is employed. We are expecting refunds from CRA, however had not had the chance to complete the tax filing due June 15th (today obviously). It will be my first time filing and want to take my time going through each detail and reconcile against my books.

    1st question: Is it a problem to file my taxes late, even though neither of us owes money? I know that child benefits (we have one under 16 yrs) will be delayed but that is not a concern right now.

    2nd question: My daughter (9 years old) will be working a few hours over the course of 2 months (similar to an occasional on-call as needed) to help with sorting through my papers (receipts, tallying up, etc). Do I have to set up a payroll system for her or can I just issue her a cheque? Is $10/hr (assuming this is about min hourly rate, need to check on this) ok and where would I expense this?

    3rd question: I talked to numerous people that work as self-employed and on contract with an organization where they ‘travel’ to the client’s location for work (i.e. Bank A as business analyst). They are claiming breakfast and lunch stating that these are meal costs for travel, however, this is a daily expense. Is this acceptable?

    Thank you, and appreciate your reply to these questions!

    • superAmin says:

      Hi Susan,

      My responses to your questions are as follows:

      (1) It’s not a problem to file your tax return late if you are expecting a tax refund. This is not recommended, because if your expectation for a tax refund is wrong, and owe money to the CRA, then you will be penalized for filing late.

      (2) Your company needs to register for payroll and has to provide a T4 slip to your daughter for salary paid to her during the year. Payroll taxes must be deducted from each of her paychecks and remitted to the CRA by the 15th of each month.

      (3) This is not acceptable. Meals and entertainment expenses incurred when taking out a client or person of business interest are 50% deductible.

  39. Michael says:

    HST(13%) + IT(15%)+ CPP(9.9%)
    =37.9%

    So for someone who is self employed, I have to put aside 37.9% of my income daily?

    That’s before deductions and what not, but still, that’s quite the amount of cash to put aside.

    • superAmin says:

      Hi Michael,

      Thanks for your question. The GST/HST that you collect from customers (rate of 13% in Ontario) is not your ‘income’. This money belongs to the government, so you should set it aside for repayment. In addition, while CPP premiums are 9.9% of net self-employment earnings, they are capped at approximately $4,000.

      You can considerably lower your income tax rate, and avoid paying CPP premiums by incorporating your business. Corporations only pay tax at a rate of 15.5%. In addition, CPP premiums are not payable on dividends paid by the corporation to you.

  40. Brenda says:

    Hello
    My question is as an independent contractor, I already claim expenses of car, equipment, etc and occasionally have casual labor help. When filing tax forms, do I also allow a salary for myself in line 9060 that says “salaries and wages”?

  41. Muhammad says:

    Hi Allan,

    Thanks for the helpful article, by far the best one I’ve come across for a layman like me (newcomer to Canada). I work as an IT consultant working out of my home for a US company. Our family moved to Canada this year so we’re yet to file taxes. Would appreciate if you can provide advice on the following:

    1) Friends and family have been recommending that I register a sole proprietorship with CRA now to be able to claim business expenses. Is registering a sole proprietorship by name necessary or can I just claim business expenses on my personal return (which is what I understood from your article)?
    2) Can I split income with my wife somehow (pay her salary as office admin?) She isn’t employed.
    3) Any steps I need to undertake right now to set myself up for tax savings (annual salary expected around CAD 70-80K) or should I just wait for year end.

    Thanks in advance,
    Muhammad

    • superAmin says:

      Hi Muhammad,

      Thanks for contacting me. My responses to your questions are as follows:

      (1) You can operating a sole proprietorship under your personal name. It’s a best practice to obtain a master business license and open up a business bank account to add validity to your sole proprietorship and to defend yourself against a potential CRA challenge that you are not ‘conducting a business’.

      (2) Yes, you can pay a reasonable salary to your wife for administrative work. Make sure that you prepare an employment agreement, and have time sheets to support the work that she does.

      (3) Consider incorporating your company to save taxes. The corporate tax rate (15.5%) is significantly lower than your personal tax rate as a sole proprietor. We offer incorporation services, tax filing services and tax planning advice.

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