Budget update and self-employed tax

By Fin MacDonald, Fin Tax Service

Two main issues in the recent Federal Budget are the ending of the Public Transit Credit, and the re-arrangement of the Caregiver Amounts. The Canadian government will be ending the Transit Credit at the end of June. When you file your 2017 Income Tax Return, only Bus Passes for January to June will be eligible. The passes for a family may still be claimed together. The changes to the Caregiver Amount are more complex. I will deal with them in the fall when I look at tax planning.

Self-Employed Persons and Income Tax

Each year the Canada Revenue Agency (CRA) selects a group of Tax Payers to be the target of it’s “Select Audit Group”: this year 20 to 30,000 letters went out in February and March to “individual taxpayers and business owners claiming consecutive business or rental losses, and selected taxpayers who may have sold rental property” (from the CRA’s E-mail announcing the letters). The Supreme Court of Canada in Stewart Vs Canada (2002) ruled that the “reasonable expectation of profit” doctrine could no longer be used to deny Self-Employment and Rental losses. And, yet, the CRA is still trying to scare people with losses into not reporting them!

The filing deadline for Self-Employed people and their Spouses this year is June 15. All taxes payable, however, are due by midnight May 1. Until the early 1990s Self-Employed people were able to take any day in the year to be their year-end. So, naturally, most chose January 31 or February 28; and taxes were not due until April 30 of the following year. So, the government of the day changed the rules and began to require all Self-Employed to use a December 31 year-end. So that no one had to pay 22 or 23 month’s taxes on one return, this was phased in over 11 years. The June 15 filing deadline is a legacy of that process.

The first question is: Are you REALLY self-employed? If you do all of your work for one employer and they determine the W5s (Who, When, Where, Why and How) of the work, you are probably not self-employed. 

Disadvantages of being Self-Employed

Being self-employed means you have to pay both the employer and employee portions of the Canada Pension Plan premiums. This amounts to 9.9% of your Self-Employment income between $3,500 and $55,300.

Except for some special provisions for Parental and Maternity Leave, self-employed individuals (and their family members working for them) do not qualify for Employment Insurance.

Suitability for being Self-Employed

Some people end up self-employed when they are down-sized from their former employment relationship. In slow economic times the number of the self-employed does grow as the involuntary separations from employer relationships increase. When times improve the number of self-employed tend to fall. Many people are not suited to the uncertainties of being in business for one’s self. Having an in-demand set of skills, a willingness to go that extra distance to keep clients happy, an outgoing personality and the ability to prioritize and re-energize are some of the basic characteristics needed for successful self-employment income.

What Expenses Can be Deducted?

For the novice, in looking at what can be deducted, it is necessary to look at Current Expenses vs. Capital Expenses. For example; you have a landscaping business. The cost of supplies such as shrubs, top soil, fertilizer, gloves, hand tools, wages for employees are examples of Current Expenses. These can be deducted in full each year. Examples of Capital Expenses are a work truck, a trailer and equipment with a longer life expectancy such as a chain saw. These are subject to Capital Cost Allowance (CCA); this is determined by what Class the item is in. A trailer would be in Class 10; the CCA rate is 30%.

An example: Rowena buys a used trailer for her landscaping business. It costs $5,000 (including GST and PST). The year an asset that is subject to CCA is purchased, it is subject to the 50% rule – meaning only half of the normal CCA may be claimed. So, in the first year she would be able to write off (5,000/2) x 30% = $750. The next year the CCA would be (5,000-750) x30% = $1,275, and so on.

Neither CCA or Business Use of Home Expenses can be used to create a loss – on either a self-employed persons T2125 Business Schedule, or a Rental Property Owners’ T776 Rental Schedule.

Other Expenses

Automobile expenses may be claimed if you use a vehicle in your business. It is necessary to demonstrate to the Canada Revenue Agency (CRA) what portion of the vehicle’s use was for business and what portion was for personal use. This may be done by using a logbook. Each time you use the vehicle for business, note the number of KM at the start and at the end. This needs to be done for a full year. After the first year, if your personal/business use is the same, only three months per year of log book is needed. Using the percentage derived from the logbook, the expenses such as CCA, fuel, maintenance, parking and license can be claimed.

Business Use of Home allows for the deduction of some of the expenses you incur as a renter or home owner. First you must determine what portion of your home is used for business. An example: you have a three bedroom apartment with kitchen, dining and living rooms. If you use one bedroom exclusively for business, you are using one sixth of the apartment (bathrooms don’t count). If you are using a part of a room, the calculation is much more complex. How many square feet out of the total in the home are you using. What portion of the 24-hour day are you using it? Do you use it every day? Amongst the home expenses that can be used are, if you rent: the rent, utilities, home insurance. If you are a home-owner: Mortgage Interest, Property Taxes, Utilities, Maintenance and Home Insurance.

Other expenses allowable include premiums for yourself and your family and your employees for Private Medical Insurance. This is potentially one of the biggest deductions; it is not subject to the 3% of Net Income Deduction that other medical expenses are subject to. Meals and Entertainment for clients may be deducted at 50% of their cost. Advertising, office expenses, professional fees, subcontracts, WCB payments are other deductions. Half of your CPP contributions may be deducted from income; the other half is a non-refundable tax credit.

So, there are many tax benefits to being Self-Employed, but is the uncertainty for you? Next Beacon a look, through my lens of Helping You to Keep More of YOUR Money, at tax planning.

Happy 25 years to the Beacon from everyone at James Bay Community Project (JBCP)

Influences: Poem to Emily Carr