Tax Tips

When it comes to income taxes, self-employment can be more attractive than working for someone else. That’s because a self-employed person can usually deduct any reasonable business expense necessary to earn business income. If you are self-employed, or thinking about going that route, keep these tax deductions and tax tips from the experts in mind.

Home office expenses – “If you are self-employed, home office expenses must relate to a workplace that is either your principal place of business, or is used exclusively for the purpose of earning income from the business,” says Chartered Accountant Ian Hulbert, Partner, Taxation, with Grant Thornton LLP in Toronto. “In this context, ‘principal’ is generally interpreted as more than 50 per cent of the time. To meet the second criterion, the space must also be used on a regular and continuous basis for meeting clients, customers or patients.” If you qualify to claim home office expenses, you can deduct a portion of the operating cost of your home. “For example, if your home office takes up 10 per cent of the total square footage of your home, you can claim as a deduction from your business income 10 per cent of your mortgage interest, property taxes, heat, hydro, water, home insurance and maintenance costs,” explains Hulbert. “Any expenses directly related to the home office can be deducted in full.”

Vehicle expenses – “A self-employed or independent contractor’s deduction for car expenses is a percentage based on the business kilometres over the total kilometers driven in the year,” says Chartered Accountant David Silber, Manager, Taxation Group, with Soberman LLP in Toronto. “Deductible expenses include fuel and oil, maintenance and repairs, insurance, licence and registration fees and leasing costs.” Be sure to keep a vehicle log that captures the number of kilometers you drove for business.

Meals and entertainment expenses – “In most cases, only 50 per cent of meal and entertainment expenses are deductible,” says Hulbert. “This rule applies to everyone – sole proprietors, corporations and partnerships.” Be sure to keep detailed records so you can demonstrate that the expenses were business-related.

Equipment expenses – “Other expenses that can be deducted, providing they are incurred to earn income, include expenses relating to the Internet and phones,” says Silber.

Convention expenses – “If you are carrying on a business or practising a profession, you can deduct expenses for attending up to two conventions a year,” says Hulbert. “These conventions must relate to your business and must be held within the territory in which the sponsoring organization conducts its affairs.” You can deduct 50 per cent of the actual cost of meals and entertainment at the convention. If the convention provides meals and/or entertainment, but does not note their cost separately from other convention fees, $50 a day will be subject to the 50 per cent rule. “As with all expenses, convention costs must be reasonable in relation to your business, and you should be able to prove your attendance and support your expenses with vouchers or receipts,” adds Hulbert.

Separate your business and personal finances – “If you are self-employed, you should separate your business and personal revenues and expenses,” advises Hulbert. “Separate bank accounts and credit cards are an easy way to do this, and will provide a paper trail to produce financial statements or other support if requested by the Canada Revenue Agency (CRA).”

Set aside enough money to pay your taxes – “In Ontario, personal taxes on income range from as low as 20 per cent to as high as 46 per cent,” says Silber. “On a monthly basis, setting aside a certain percentage of your net income is one way to estimate what your taxes may be at the end of the year.” The CRA requires taxpayers to pay their income tax by instalments if, in the current year, and in either of the two preceding years, their net tax owing is more than $3,000. “This is a good measure to use to determine how much tax to set aside,” says Silber. “However, you should always be aware that if you have a good year and earned more income than the prior year, you will have to pay some additional taxes when you file your return.”

Determining what expenses you can deduct, as well as the amount you can deduct, can be complicated. Talk to a Chartered Accountant to make sure you are claiming everything to which you are entitled.

Source: Institute of Chartered Accountants of Ontario