Tax Advice for the Self Employed

If you have a home-based business and or operate a business without being incorporated, the Canada Revenue Agency (CRA) considers you to be self-employed or a sole proprietor.

You will be reporting your income on lines 135 to 143 of page two of the T1 General Form. Please don’t wait to the last minute to get your printed T1 forms and guide from the post office since they usually run out of them very quickly.

To determine your income for the year you will need to complete form T2125 titled Statement of Business or Professional Activities. The form is new for 2010; it combines Forms T2124 Statement of Business Activities and T2032 Statement of Professional Activities used in prior years. You can find the five page form and a 55 page guide on how to complete it on the CRA website. It’s not so bad, you just may want to ease the pain incurred from your reading session by consuming a glass of your favourite beverage afterward.

As a self-employed individual, you are required to report your business income using the accrual method of accounting. In other words, you report your income in the year you earn it and not when you get paid for it and you deduct your expenses in the year you incurred them, meaning that you have paid for them or will pay them in the near future.

If your income is commission based, you can use the cash method and report your income in the year you receive it and deduct your expenses in the year you pay them.

Form T2125 includes a list of typical business expenses and you can include other expenses as long as they were incurred to earn business income.

You can claim “business-use-of-home expenses” if you have a home office. The expenses usually include your heat, electricity, internet, insurance, maintenance, mortgage interest and property taxes. You will need to calculate the square footage of your office to determine the percentage of the expenses you may claim. If your office is 200 sqft and your home is 2000 sq ft, you will be able to claim 10% of the expenses. If your office is also used as a guest bedroom or den with a television, you will only be able to claim the square footage that your desk occupies in the room. Therefore, it is more advantageous to use the room solely as an office. Also, these expenses cannot be used to create a loss. If they do, enter them on the Form anyways, but carry them forward to be used in future years.

The guide will provide examples to help differentiate current expenses from capital expenses. Capital expenses are usually for equipment purchases that exceed $500 (per item). If that is the case, you will need to complete the “Calculation of Capital Cost Allowance (CCA) Claim” section of the form. This type of expense is considered to be an asset and only a percentage of its cost can be expensed every year.

The last section of the form is for motor vehicle expenses. You can claim a percentage of your expenses such as gas, interest, insurance, maintenance and repairs and leasing costs based on the kilometres you drove during the year to earn business income versus the total kilometres driven during the year. I recommend that you keep a notebook in your car to log the kilometres you drive for business purposes to make sure you don’t forget any.

Have fun!

Please note that you can download the guides from the CRA website directly to your desktop and don’t forget to recycle your unused forms and guides.