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Allan Madan, CPA, CA
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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.
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.
I am interested to open a company for self employment and trading . Please Guide your charges.
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
Very Interesting article. learned a lot
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?
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.
Just curious as to what other benefits incorporating my business will have I hear about a small business deduction available to certain businesses?
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
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
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
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
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
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
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
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
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.
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?
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
Hi, How do you claim purchase a a cell that is use for the business, don’t see anything under business expenses for it.
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
Did you say I-phone is a capital asset and it will need to be depreciated through the CCA? I’ve always thought that Electronics such as Computers, Tablets, Printers, Smartphone is 100% tax dedcutable and not need CCA?
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
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
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
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
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?
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.
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?
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: 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
Hey Allan, I am about to open my own catering business. How do CPP plan payments work when you’re self-employed?
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
Hi Allan,
Can you please explain this CPP deduction that you made to reference to in your post above? I cannot find a line 22 on my T1 to claim this, and in my 16 years of being self employed have never claimed this employer’s share deduction.
Hi Jason,
CPP premiums payable on self-employment earnings are deductible on line 421 of your T1 return. See http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/421-eng.html
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?
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 www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/t2125/menu-eng.html?=slnk.
Regards,
Allan Madan and Team
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.
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
Incredible points. Great arguments. Keep up the great work.
Feel free to surf to my web blog :: CPA Profit Secrets
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?
Hi Gupta,
Car expenses incurred for business purpose is deductible. Car expenses include:
Capital cost allowance (if you own)
Fuel & oil
Insurance
Lease payments (if you lease)
Parking
Repairs & maintenance
Toll charges
Vehicle registration fees
In addition, there is different tax implications for bought and leased cars. Please refer to http://madanca.com/blog/is-it-better-to-lease-or-buy-a-car-for-a-business-in-canada/ to learn the different tax implications.
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
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,
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.
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
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
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.
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!
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
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
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.
Just wondering about writing off nanny wages as business expenses. My husband and I both work full-time, and he is about to start running a truck for work (being paid for the use of an adequately tooled truck – he’s an Electrician). Could we operate his truck under our current business license for our nanny, and also would it be possible to then write off all nanny expenses instead of just a small portion of what we pay her (the maximum childcare deductions are nowhere near what she is paid in a year)? We would also be writing off a portion of his tools and all fuel/maintenance expenses and I would be hired to do some basic bookkeeping for the company. Thanks!
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?
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.
I just incorporated and work as IT contractor. I want to know following things:
I am invoicing and deposition cheques into incorporation. My wife is housewife. To enable tax benefit : Can i pay dividends to my wife.
How to calculate my annual income ? Say if i earn 50000 and pay dividends to wife for 20k and for me 10k. Is my annual income 10k and wifes 20k.
How CRA assesses my company’s income? Does it happen from client’s expenses?
Thanks,
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
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.
Hello Madan,
I am trying to incorporate my IT consulting services. My question is: Are the initial expenses associated with setting up the incorporation are eligible for business expense deductions (even though I paid those expenses from my personal account)
Thanks,
Meena.
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 !!
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.
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.
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.
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?
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.
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
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.
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
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,
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
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.
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.
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
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,
Do I have to capitalize a smartphone I have purchases for solely business purposes or am I able to expense it in the year?
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,
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
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,
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
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.
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!
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.
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.
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.
Hi Allan,
I got a 6 months contract assignment with a bank in downtown toronto for which I incorporated. Suppose corporation makes $100,000 a year, could you suggest what is the best way to split the income into salary and dividends in order to maximize tax benefits? Also please share the different taxes deducted at different stages, and how much do i end up getting after all tax deductions?
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”?
Hi Brenda,
If you are a sole proprietor (i.e. not incorporated), then you cannot pay yourself a salary.
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
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.
Hi Madan:
I watched your video on YouTube that really helpful. “Pay Salaries to Family Members” self-employed or sole proprietorship income.
What is the age restriction of the kids? In logical I believe that I cannot pay a salary for any minor. Is there any rule and which ITA section?
Finally, if you conducted Hands on Training on Tax preparation with a minimum fee a lot of people will be benefited from you.
I am waiting for a reply.
Thanks
Atiq
on advertsing
Hi my question is
My commercial cleaning business is sole proprietor
I have contracts that total $184,500. Per year
After expenses my net is approx $$70,000.
Would you say its best to incorporate
I dont have a spouse to income split with
Thank you in advance for your answer
Leslie
Hi Leslie,
Whether or not to incorporate for tax purposes depends on how much after-tax money you require each month to pay for your personal and household bills.
For example, assume that you only need $3,000 after-tax per month to pay for all of your personal and household bills. In this case, it would make sense to incorporate to save taxes. On $70,000 of business profit, your corporation would only pay $10,850 of income taxes, while you would pay $0 in taxes if you received ‘dividends’ from your corporation in the amount of $35,000 per year (assuming that you have no other sources of personal income).
On the other hand if you operated as a sole proprietor you would pay approximately $14,800 of personal income taxes plus an additional $4,960 in CPP premiums. Therefore, your total tax savings by incorporating would be $8,910 in this example.
Our firm offers tax planning, tax return preparation, and incorporation services. For incorporating a company, please see http://madanca.com/services/corporate-and-business-tax/incorporating/
Hello,
I’m quite intrigued by many of the questions & responses here & thank you for all the information!
I am a landlord for 2 separate rental homes. I also have a room mate living with me now, paying me monthly rent. As I understand the thread, it is much more beneficial for me to “incorporate” & fall into a lower tax bracket with this income. Please correct me if I’m wrong.
My question is, since I do not have a separate room dedicated to “the business” am I right in assuming that I cannot deduct hydro/gas/water expenses in my own home since having my room mate? I’ve also recently built a shed & had a sump pump line repaired in this home. Considering I have a room mate, can these expenses be deducted under “maintenance & repairs” against rental income?
Thank you for your time.
Hi Rhonda,
Thanks for your questions. Unfortunately, net rental profits earned by a corporation in Ontario are taxed at 46.2%. This is because net rental profits are considered passive income as opposed to active business income. So it may not make sense for you to incorporate your real estate.
If you have a separate room dedicated for working on your rental activities, then you can claim a portion of your house bills as ‘home-office expenses’. This portion is equal to the size of your home office as a % of the entire size of your home. The deductible % must be prorated by the time that you spend in your home office working on rental activities compared to the total time available in a day. So practically, home office expenses for landlords end up being a small deduction.
if I work from home and I use my basement for my home, can I deduct roughly 1/3 of the home expenses?
Hello;
Ok so last year my husband and i both worked regular jobs. I did for the first 6 months, he has the whole year. So we both have t4 slips. However the last 6 months we also were *self employed contractors* doing team designated driving for a company. So my questions are..
1)how do i file that on our returns? We arent a corperation and i have no idea if we are considered partnership ? Sole proprietors? Neither? Lol.
2nd) the income we made…do i split that 50/50 for our returns?
3) we also paid the company we work for 39% royalties off the top of everything made. So when we do the taxes..do we claim everything before or after the royalties, and are the royalties a writeoff?
Thanks in advance
Sharon
Hi Sharon, thanks for your questions. Both you and your spouse must complete form T2125, Statement of Business Activities, to report the income and expenses from the business. Since you are co-owners, split the income and expenses on a 50-50 basis between the two of you. Royalties paid can be claimed as a business expense on form T2125.
I am planning to open a small auto detailing services maybe a mobile one. I may say this is a desperate move on my part because i just got lay off and don’t have money. This is my second time being lay off this year i am a skilled welder by the way. Is it better to to just open the buiseness under my name or with my wife aswell? Can you give me an advice on what to do please, i have no idea about running a buiseness but, i need to earn money for my mortgage and loans. Thanks!
Hello Alamid,
Since you’re in a low tax bracket, it will be better for you to open up the business under your name and have all of the business income allocated to you. That way you will pay less tax.
Hi,
For the last year I have been self-employed cleaning houses. Here are my questions:
– Do you have to register with the government as a sole-proprietor?
(I do not require a business number or GST/HST number in my situation)
– Do I have to fill out the business expenses section of a T2125 form or can I simply fill out a T777 for business expenses and write my expenses off there?
– Where in my return (where on a T2125 form) do I include the cost of all the supplies I use for cleaning?
(Under business expenses there is a section for “supplies used indirectly to provide goods or services” but seeing as the main focus of my business is cleaning I’m not sure if cleaning supplies would fall under this category or not).
Where I’m getting confused is that up until this year I had been working for another company as a “contractor” so I was not employed by them and did not receive any kind of tax form at the end of the year (ie a T4 ect) and also had to keep track of my own expenses and mileage. They just sent me a statement everytime payments were sent out so as I had a record of what I was being paid, but no taxes (or cpp, ei ect) were deducted from the money I was making.
I guess what I’m asking is where do “contractors” fall into place??
Not until this year have I heard of having to claim things as a sole-proprietor and the only difference I can see between my situation for 2015 vs previous years is that the company I was contracting for acted as a go-between between myself and clients and that company would collect payments and then pay me so all my income was coming from one source – rather than me collecting payments from each customer individually, but I still was not employed by the company paying me. Would I still be considered a sole-proprietor in that situation?
And one last thing: would the cost of acquiring a criminal record check go under “other expenses” or under another category?
Hopefully you can help me out!
Thanks!
Danica.
Hi Danica,
Thank you for your questions. My answers are as follows:
1. You do not need to register with the CRA. If your total sales are more than $30,000 in the last 4 quarters, then you do need to register for a HST number and charge HST to your customers.
2. Complete a separate form T2125, Statement of Business Activities, for each business. Do not complete form T777 – this is meant for employees only.
3. Enter supplies consumed on line 8811 of form T2125.
4. The cost to of running a background / criminal check should be entered on line 9270, “Other Expenses”.
5. It appears that you were self employed in 2015. This is why I recommend that you complete form T2125, as discussed earlier.
Hi , I just get sub contract with garbage company. I hv truck on lease. How i can save tax . Can I show my wife as employee.
Hi Navneet,
Your company can pay a reasonable salary to your wife. Keep these points in mind:
1. The rate of pay must be reasonable
2. Time sheets should be prepared documenting the hours that your spouse works each day
3. Payroll taxes must be deducted from each paycheck made to your spouse and remitted to the CRA on a monthly basis
4. Employment agreement should be prepared to document the work duties that your spouse will perform
Great info guys!
I am a self employed commissioned employee and would like to know my options on income splitting and tax planning.
– Can I hire my wife as a contractor or is it better as an employee? Payroll sounds complicated.
– What about my siblings who do not live with me?
– If I incorporate, is it better to wait till year end as we are already half way into the year.
– Do all income has to be paid to the corporation, once its established?
Will be happy to sit down for a consultation as well.
Thanks
Hi Raj,
Consider claiming the family tax cut to split income with a spouse (only applicable for the 2015 tax year). Other options for income splitting include:
– paying a reasonable salary to your spouse
– having the higher income spouse pay for the household bills, thereby freeing up cash-flow for the lower income spouse to make investments in income producing assets.
Thanks for response.
Just quick question about employing spouse, do I still have to pay EI as they may consider this as non-arms length employment.
Since I will be paying CPP as well, does it still make sense to split income and pay her say about 20k? My income was 120k last year which I was able to bring down to 90k with deductions like automobile expense, home office, etc.
Hi Raj,
Generally speaking, EI premiums are not applicable to salaries paid to family members. To prove to the CRA that a salary of $20,000 is reasonable, please prepare the following documentation and keep it on file:
* Employment agreement
* Time sheets
* Pay cheques
* Supporting documents to prove that the rate of pay for your spouse is the same as market rates
So me and my husband started a tech business, and I have no idea what percent we should be setting aside for tax out of what the business makes, please help!for example, The business makes 100 one day, how much should we put aside for taxes, we live in be canada
Hi Erika,
Thanks for contacting me. It’s very difficult to answer your question without knowing your other sources of income and expected yearly profit from your business.
Hello.
I work full-time and make approx. 100K a year. I am considering starting a consulting business on the side and am wondering whether it is best to do so as a sole proprietorship or a corporation. I doubt that I would be making more than 30K from my consulting firm for the next two years. Is it better to benefit from the tax reductions as a sole proprietor (e.g. mortgage and property tax percentages, utilities, car related expenses, etc.) or from a reduced tax rate as a corporation?
Thanks for your help.
Hi Dee,
Thanks for your question. Incorporating makes sense in your situation if you have the financial ability to keep most or all of the profit within the corporation, and not withdraw it all for yourself. This way, you can take advantage of the small business tax rate (15%) and defer paying personal taxes.
Great article.
I have a couple of questions in regards to the self-employed spouse. My spouse and I, both, are self employed and work from home. We both are in web development and have different online clients. We both file our annual return separately.
(1) The rent receipts of our home are in my name. Can we split the rental expenses in between us?
(2) Same goes with our internet connection, the bill from our ISP comes in my name. We have a single connection that we use for our online connectivity. Can we share this as well?
(3) If so, what is the best way to split such expenses and how to do our paper work for CRA?
Hi MS
For the apartment, prorate the rent expense between the two of you based on the % of the space that each of you use for your office. For the internet connection, split the cost between the two of you based on % that use it. Be reasonable. You do not need to supply documentation to the CRA. Keep it on file in case of an audit.
Hi There! What are the rules in BC for taxable income under $19,000 a year? Im just wondering how much money I should save from the checks I receive for my small marketing and graphic design business. I work from home and earn approx $2000/month or less and this year will be under $19,000. Do I have to save anything? I have read that $43,000 a year and under must give 15% of their wage to the government
Thanks!
Hi Brooke,
Your estimated tax liability will be $3,464, including CPP premiums payable on self-employment earnings.
Hi. I have a sole proprietorship and my wife pays many of my business expenses online. The receipts are in my name, but she is using her own credit card. Is that okay in the eyes of the cra?
Hi Cj,
In this situation, I recommend that you prepare a written agreement that stipulates that you will repay your spouse for the expenses she paid on your behalf. The written agreement should also specify the exact amount to be repaid.
Going forward, I recommend that you pay your business expenses with your own debit or credit card to avoid any confusion.
I have a small business that I am thinking about incorporating.
As I understand it, my new Alberta corporation will pay around 13% tax. But then when I pay self in dividends, I have to pay tax on that (albeit slightly reduced) – but it sums to virtually no savings for me?
I’m a little bit confused here on what my dividend tax rate would be. Or what the general strategy to take is. Can you help with my understanding please?
Hi Rylan,
By incorporating your business, you can defer personal taxation to the extent that your corporation retains its profits. If your corporation distributes all of its profits to you, then you will not save taxes by incorporating.
“Hi Amin
my wife and i run a wholesale import business as a partnership since 2012. To date we have only filed our 2012 taxes (all kinds if reasons). We have now prepped the last 3 yrs and are on the cusp of filing all at once. We have grown 45% yr on yr sales for 2015 are $275k with $120K net split between us @ 26% means roughly $15k each in tax due. I know that incorporating can reduce to 15% but i saw somewhere it can be down to 11% if we make a “”small business deduction”” is this true and what it is it exactly? and can we incorporate at this late stage but pre filing?
I had always intended to incorporate but i wanted to build value in the partnership first and then sell the partnership to a new Ltd co. As someone said this was a way of creating a tax free drawdown account in the Ltd Co – ie paying the cost of buying the business. Again is this true and what are the methods and constraints for valuing the partnership thus determining the size of drawdown account ? Any other considerations ?
Thanks for considering
David”
Hi David,
“You cannot save taxes on business profits earned in the past by incorporating now. The small business rate is approximately 15% (combined federal + provincial rate). The rate of 11% is the federal portion only.
Assets of the partnership can be transferred to a corporation using a tax-free rollover provision pursuant to the Income Tax Act. A rollover form must be sent to the CRA and a transfer agreement must be prepared. You cannot create a draw-down as you suggested.
I can incorporate a company for you and help you with the rollover.”
“Hello,
I just incorporated this year. I am still having some trouble understanding everything that I have to pay. If I make $100 000 this year in my corporation, how much of that is safe to pay myself? I know I have to take into consideration HST, business, and personal taxes, but I’m still unsure of what fraction I should leave in the business to pay these things. Can you help? Some of my consultant friends and colleagues suggested I leave 1/3 of everything my business makes to pay for all of these taxes. Is that enough?”
Hi Kendall,
Set aside the HST your company collected, and most of this must be remitted to the CRA. For the profit (e.g. $100,000), set aside 15%, or $15,000 in your case, for paying corporate taxes.
I have rental income which I report as sole proprietor which means it gets added to employment income from full time day job and gets taxed at over 46%. I was thinking to splitting income with my child under 18 year of age by hiring them in rental business and paying them around $11000 basic exemption. I understand I have to pay them salary before Dec 31, 2016 and issue them T4 by Feb 28, 2017. I have 3 questions :
1- Can you still hire children even though it’s NOT incorporated business ?
2- Do I have to issue them T4 even though I am not deducting taxes/CPP/EI at source ?
3- Can I pay them lump sum of $11,000 in December for entire year by transferring money to their separate bank account ?
Hi Tanvir,
Yes, you can still pay a salary to a child even if the business is not incorporated. Your sole proprietorship must have a payroll number. In addition, a T4 must be issued by February 28 of the following year. Finally, you should pay your child as they earn the salary (not in a lump-sum payment).
Any reasons I should wait till 2017 to incorporate. Or is anytime a good time.
Thanks
Hi Steven,
If you don’t care for a calendar year-end (Dec 31), then any-time is a good time. Tip: Some companies incorporate on July 31 so that they can accrue bonuses in the company’s financial statements. The bonuses are deductible in the year accrued and payment of the bonuses can be deferred until January 31 of the following year. This allows the employee receiving the bonus to defer personal taxation on the bonus until the following year.
Hello,
I currently have my own consulting corporation and am also wondering how much I should have set aside for taxes. Is just the 15% enough or will there be other things I need to set aside for? Like Kendall, I was also under the impression that I would need to set aside 1/3 of my income.
Thanks
Hi Joesph,
Set aside 15% of profits to pay for corporate taxes. Also set aside the HST you collected (13% of sales).
Hi. Great blog!
Just trying to wrap my head around all this.
If im incorporated and the income changes from year to year. Am i correct to assume the following.
Lets say i make 120k the first year.
I pay myself 40k in a salary. Then take out 40k in a dividen. Leaving the extra 40k in the corporation (leaving out other expenses etc for the example)
Lets say year 2 the business makes 130k and i do 40k salary and 35k dividens.
But year 3 business is very poor and i only make 40k.
If i still took out my 40k salary in year 3. Does that mean i wouldnt have any corporate tax to pay that year?
Because basically it would be 40k income less the 40k exspense(salary) =$0
Also another question.
If im going to have 80k a year in personal income im going to be taxed on the dividens i take out of the corporation. But how does that work on the personal side. I get the cra remittance at source for my salary. But if i took out 40k in dividens its not an exspenses and therefore i need to pay 15% corporate tax on that money. But what should i do on the personal side. Set aside 20% for tax time in another account or something?
Thanks
Hi Steven,
In year 3, the taxable income and income tax payable for the corporation is $0.
On 40,000 of dividends, your estimated personal tax liability is $526.
Hi,
I recently went back to work as self employed (sole proprietor). The vehicle I drive is paid off. Can I claim the value of my truck?
Also I have to pay CPP? There is no way to opt out.
It seems like my mistake this year was not incorporating myself to get that lower tax rate.
Thanks!!
Hi Nicole,
Thanks for your questions. You must determine the fair market value of your vehicle as of the date that you began using it in your business. You can obtain the FMV my looking at websites that sell used vehicles of the same make, year, and condition as your vehicle. This value will be used as the basis for calculating depreciation expense for your vehicle each year.
Yes, you must pay CPP premiums on your net self employment earnings.
Hi Allan,
This is very helpful information, thank you for sharing. I have one question, could you please help me, thank you.
It looks like I need to amend T2125 from last year (2015) since I didn’t include the condo fee as Home Office Expenses, and made a mistake counting the room (I have a 2 bedroom condo, so total rooms should be 3 I guess if not including kitchen). So this year I didn’t see any carry forwards expenses after Auto-Fill from CRA.
Could you please advice where I can do the amend for T2125 form and should I input carry forward amount (after re-calculation) myself in this year’s return, thank you.
Hi Terence,
You will have to prepare a T1-ADJ (which can be done online) to make the correction for the 2015 tax year.
hey there,
I’ve been separated from my husband as of November of 2016. He was self employed and I didn’t work at all in 2016. He did my taxes and said I made $6000.00 in self-employment. I didn’t work at all. Would that not be fraudulent?
Hi Shannon,
I’m not sure if it’s fraudulent. However, you have to sign your own tax return. In addition, your ex-husband is supposed to get your approval before filing on your behalf.
Great info here. I hold a mortgage for a convenience store/gas station as an individual. Would it be beneficial to incorporate? The interest portion of the payments are being taxed as interest income by CRA so would incorporation reduce taxes payable?
Hi Jim,
In your case, you will not save tax by incorporating. This is because corporations in Canada pay a high rate of tax (approximately 50%) on interest income earned.
My husband and I have a small millwork business – how do we file our income tax? We also have our children involved.
Hi Natalie,
Thanks for your question. If your business is not incorporated, then both you and your husband should file a separate Statement of Business Activities Form (Form T2125). Form T2125 should be attached to each of your returns. On this form, you must indicate the % of ownership in the business that each of you have.
If you paid your children salaries and issued T4 slips, then your children should file personal tax returns to report this income. Otherwise, you cannot split income from the business with them.
hi,
I am working as an IT consultant in a private firm. My wife started her small home based business(started in July 2016) of direct selling of cosmetic products. I had paid for all the expenses for the business as she does not have any other source of income.
The business did not earn us much but had a net loss(<2000$) after deducting expenses and we decided to stop the business in Dec 2016. We are filing the returns together. If she shows the non-capital loss in her return, it did not give us the benefit as she does not have any income. We have 2 kids, the only benefit she receives is the universal child care benefit.
Few questions : Can I show the business loss as non-capital loss in my return? If yes, in that case how do we file the return – does the expenses needs to remain in her return and I show the non-capital loss? If No, then what is the option to claim tax benefit?
Any suggestions will be much appreciated.
Thanks
Kamal
Hi, Kamal. You cannot transfer the loss from your spouse to you. You should have created a general partnership if you wanted to share profits / losses.
Hi Madan,
thanks for sharing this video. I have question.
I am IT professional in toronto, work as sole proprietor. I am using turbo tax. to pay some of my earning to my wife, what do I have to do? I called turbo tax helpline and they told me to tick mark my business has partner and give some % to my wife. is that true? what else do I have to do?
Hi, Rajen. No, this is not the correct approach unless your spouse is really a partner in the business and you have a partnership agreement with her. The other way to income split with your spouse is to pay her a reasonable salary for work that she does in your business. However, this cannot be done retroactively.
Hi Allan,
I am a full time employee earning 80,000 per year or more and have started contracting as a self employed individual. If I earn less than 30,000 contracting do I have to declare this money and am I subject to paying tax on this additional income outside my full time line of work.
Regards
Hi, Tom. Yes, you have to declare all income earned in the year. Self employment income earned by a sole proprietor should be reported on form T2125. This income, net of related business expenses, will be added to your other sources of income to arrive at your total income for the year. You must pay income tax on it.
Hi Allan – I have an new incorporated company (for consulting) and file returns each year but have not earned any revenue yet. I want to work as a business consultant (probably $150K annual range desired). I work from my home – should I work as self-employed (per your blog article – self employed save taxes) taking the earnings as income and deal with CRA taxes on my annual return OR use my incorporated company to earn the consulting revenue? I assume if I use the incorporated route, I will have to issue a T4 to myself?
Hi Danny, to save tax considering operating your consulting business through your incorporated company. You can pay yourself a salary (reported on a T4) or a dividend (reported on a T5) from your company.
Hi,
I am a realtor earning over 600K. Is it worth it to incorporate a company to save on taxes? I understand that a corporation is taxed at a lower rate ie between 15-21%. However the money needs to stay in the in the incorporated company otherwise one will be taxed at the highest personal tax rate if the money is paid back to the individual?
Alternatively can one set up a corporation and expense consulting fees to that new company assuming this new company has more then myself consulting expenses?
Which approach is better?
Hi Tony, Yes, it makes sense to incorporate to save tax. This is because corporations pay a low corporate tax rate of 15%, which will fall to only 13.5% by January 1, 2019. This is much lower than your personal tax rate.
You are right that you will have to retain funds in the corporation. However, you can pay yourself a reasonable salary to cover your living expenses, allowing you to use the corporation as a tax savings vehicle. Note that commissions can only be paid to a corporation that is owned by a broker of record, and not an agent. However, there is a bill (bill 104) that is waiting to be passed by the government, which will allow real estate agents to have commissions directed to a corporation that they own.
Hi Allan,
I have a corporation which deals in events .My daughther who is 15 helps me as needed .I intend to issue her t4a.
a)Would like your input if my corporation can issue her T4A (self employed ) and not salary ?
b) Also since she is minor are there any kiddie tax implications for the same ?
c) Instead can my husband who is self employed issue her t4A ? are there any kiddie tax implications still if he is not incorporated?
Thanks
Hi Shetal, kiddie tax applies to dividends paid from a Canadian controlled private corporation to a child of a shareholder of the corporation. The correct procedure is to pay your child a salary, subject to payroll taxes. The gross amount of the salary and the payroll taxes deducted should be reported on a T4 (employment income) slip.
Hello, can we open a corp if we are investment avisors? Our dealer says they will not pay income to a ..there must be a way.
Hi Sofia, as far as I am aware, investment advisers can receive commissions paid to a corporation that they own. However, the brokerage that you work for may have an internal policy that does not allow this.
Hi, I am self employed and i want to buy a house but i qualify for a mortgage that is too low for what I need. and they said my notice of assessment is after expenses and taxes and that is why. some people recommend not to deduct expenses so my income will be higher. my questions is i should do that? or is other way?, also how much i should pay monthly on an income of 60000? I hope you can give me an idea, I am really frustrated. and I am writting to you because I was pretty impressed with the video because i did many mistakes with my past income tax. thank you
Hi Alex, it is difficult for self employed persons to get a mortgage as compared to regular employees. If you increase your income too much, then your tax bill will be high. On the other hand, if your income is too low then you will not qualify for a mortgage. My advice is that you report your income and expenses honestly, and do not be overly aggressive in writing off expenses for tax purposes.
On $60,000 of net self employment income (after expenses), your estimated tax liability is $15,000.
Hi,
I have a day time job for CompanyA which provides me with a T4, and at the same time I work as a sole proprietor for another CompanyB. If I already have paid the maximum CPP at CompanyA, do I still need to pay CPP (employee + employer’s portion?) for my sole proprietorship when I file my T1?
Thanks,
Gabe
Hello,
I am wondering how I can properly claim a bad debt on form T2125 for a sole proprietorship on line 8590.
Here is my scenario:
– I purchased supplies for my sole proprietorship from another company which has not delivered the promised items due to fraud.
– I have filed a Police report and doubt that I will receive my supplies or the money spent and want to write this off.
Question:
Do I include the amount I spent on supplies (A receivable) as income and deduct this same amount on line 8590 as bad debt?
Or do I simply deduct this amount only on line 8590?
Should I use line 8590 or another means? Please tell me the best way to handle this scenario as I can’t seem to find a helpful example anywhere.
Thank you.
J
Thank you in advance.
J
Line 8590 – Bad debts
You can deduct an amount for a bad debt if you meet the following conditions:
you had determined that an account receivable is a bad debt in the year
you had already included the receivable in income
Hi J, report the stolen money as an ‘other expense – theft’ on form T2125. This is tax deductible.
Hi madan,
What if my corporate made a profit of $70-80k a year, but I also need to pay myself. How can I pay myself from my own company without paying too much tax? As you stated from above, corporate get taxed 15%. How about when you start paying yourself? and what avenue should I pay myself?
Hi Vince, the corporate tax rate in Ontario for small businesses earning up to $500,000 has been reduced from 15% to 13.5%. As such, your company’s profit of $70K to $80K, will be taxed at 13.5%. To pay the least amount of personal tax, have your company pay a dividend to you, up to $35,000 (tax-free amount).
Hi.
In short i have an incorporated small trucking type business.
I draw a salary each month for me and my wife from the corporate account
Currenlty its $6500 a month total.
My year end is Aug and it will be my 2nd year.
i would like to know for myself how much and how i should be taxed.
Also in addition to the planned salary i have taken a one time withdraw of $9000.
Any info would be great
Thanks
Hi Russell, I understand that the gross salary paid to you and your wife from your company is $3,250 per person per month (or $6,500 per month in total). You also made a one time bonus payment of $9,000 or $4,500 per person. This means that your and your wife’s annual taxable compensation will be $43,500 each.
As a result, you and your wife will each have a personal tax liability of $8,880. Note: Your company is responsible for deducting payroll taxes (CPP, Income Tax) from your paychecks and remitting the taxes deducted to the CRA by the 15th of each month. In addition, your company must issue a T4 to each of you, which will report the gross salaries ($43,500) and taxes deducted ($8,800).
How much income would I have to make in a year to owe $100,000.00 in HST?
Hi Aaron, assuming that all of your customers are in Ontario (13% HST rate), then your business would have to make sales of $769,231 to Ontario customers in order to collect and owe $100,000 of HST.
Thank you the video was very informative. Just one question is the information in your video up to date (2018)?
Hi Eddy,
Thank you for your feedback. The tips are still valid, but some of the rates have changed.
Hasn’t the ability to pay your family members changed?
Hi Schenley,
The rules for Income splitting with family members through the payment of dividends from a Canadian private corporation have changed in 2018. More specifically, the following restrictions have been placed on dividend payments to family members:
1. Your family member (18 or holder) has to work 20 hours per week consistently in the business and the amount of dividends paid must be reasonable based on the complexity of the work and hours worked; OR
2. Your family member is 25 years or older and has made a substantial monetary investment in the business.
Note that the new dividend restrictions do not apply to Canadian private corporations that have less than 10% of total income from services.
Hello. I’m self employed I own a truck and do deliveries with it. I’m.looking at making $140,000 this year before taxes and deductions. My wife works part time making around $10,000 a year. Any tips on paying less tax? I am not incorporated. Should I be?
Hi James,
It depends on the number of expenses you have. If your net income (after expenses) is more than $75,000, then the tax savings from incorporation will outweigh the costs associated with setting up and maintaining a corporation. Furthermore, consider paying a reasonable salary to your wife, if she helps in the business (e.g. office administration). The salary will be tax-deductible to you, and taxable to your wife. Since your wife is in a lower tax bracket than you, your family will save tax overall.
My spouse and I will move to Toronto on March as permanent residence. We are planning to work as IT Consultant for a Company in Panama who will pay for us around 50000.00 USD a year. What will be best for us:
1. Be two independent contractor.
2. Only one be a contractor and pay a minimal salary to the other, as spouse.
3. Be a partnership business and get dividend from the utility.
Both are 62 years old. Thank you
Hi Soraya,
Consider incorporating a company in Canada to receive income payments from your Panama customer(s). Canadian corporations pay a low rate of tax – 12.5% on the first $500,000 of business profits. Furthermore, your corporation can pay you a salary or dividends. The corporation can also pay dividends or salary to your spouse, so long as the amount is reasonable based on the work performed and the time spent. Note: There is an additional condition for dividends paid to a spouse: Your spouse must be consistently working in the business for at least 20 hours per week.