Taxes 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 by recording it on lines 135 to 143 of the T1 General Form.
To determine your income you will need to complete Form T2125 titled Statement of Business or Professional Activities. If you have more than one business, you will need to fill out a T2125 for each one.
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 already paid for them or will have to pay for 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.
I recommend downloading a copy of the Business and Professional Income Guide from CRA’s website and browsing throught it before you begin completing the form.
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 sq ft 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 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 (amortized) 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.
The filing deadline for sole proprietors is June 15. However, any income tax owing must be paid by April 30.
The CRA website is the one to go to for information and Google can also be helpful.
A note for the environment… Unfortunately, I use a lot of paper and I recycle the sheets that don’t have any confidential information by using them as “scratch pads” or giving them to my daughters for their art.
A few weeks ago I received a package and the company used shredded paper (in lengths not cross cut) instead of bubble wrap and my products were wrapped in magazine pages instead of tissue. What a great way to recycle and save on shipping materials.