In today’s economic reality, young workers often have to settle for short-term contracts while earning less than they desire. Many turn to freelancing – the gig economy – or full-fledged self-employment to pay the bills.
Having business income, or multiple streams of income, can present a challenge come tax-time. Here’s what self-employed Canadians need to know as they prepare to file this year:
When to file
Self-employed individuals must file their taxes by June 15th, however any taxes owing are still due April 30th.
If you owe more than $3,000 in the current year and in either of the two previous years then you’ll have to pay income tax by instalments. These payments are due quarterly on the 15th of March, June, September, and December.
Related: Do you wait until the last minute to file your taxes?
Whether you have income from a salaried job and a side hustle, or income from one or several businesses, you’ll file an individual tax return using a T1 business income tax form to declare all of your income.
What to prepare
You’ll want to make sure you’ve got all of your business records on hand, including copies of all bank and credit card account statements for the month before and after your year-end, along with a copy of last year’s tax return, a copy of all instalments made for income tax, GST, payroll, and a copy of all NETFILE confirmations.
Make things easier on yourself at tax time by registering for Canada Revenue Agency’s My Account, an online service that lets you manage your tax information, view payment history and assessments, as well as receive communication via email.
Familiarize yourself with form T2125 – Statement of Business or Professional Activities – and see if sole proprietors need to be aware of anything new this tax year. For example, if you earn money from online business activities you will need to list all of your websites and the percentage of income generated from each site.
What to write-off
You’ve kept meticulous records throughout the year and made sure to separate your business and personal expenses. Right? Right.
The good news is that you can deduct most reasonable expenses you incur to earn business income. If some expenses have both a business and a personal component then only the business portion is tax deductible.
Home office expenses are one of the most common deductions for freelancers.
You can deduct part of your housing costs such as heat, home insurance, electricity, and maintenance. You can also deduct part of your property taxes and mortgage interest.
Related: Tax deductions vs. tax credits
CRA says to use a reasonable basis to calculate the part you can deduct, such as the area of the workspace divided by the total area of your home. Personally, I use 15 percent of our house as a ‘home office’ and so I deduct 15 percent of the expenses listed above.
Other items that can be written off include capital property such as furniture, computer equipment, or a building that you purchase strictly for business use. These items can be deducted over time as depreciation through what’s called a capital cost allowance.
Meals and entertainment is another common deduction for business owners but it is important to note that you’re only allowed to claim 50% of the amount for food, beverages, and entertainment.
Final thoughts on self-employed taxes
Entrepreneurship of some kind might be a way of life for young workers today. As you branch out into various income streams your tax situation becomes less straightforward than that of a typical salaried employee.
Related: Here’s your year-end financial planning checklist
Extra care should be taken by the self-employed to not intermingle business and personal expenses. Keep separate bank accounts and credit cards, and come up with a good filing system to organize your receipts and business transactions so you’re ready to file come tax time.
Online brokerages are strictly prohibited from providing advice, yet many still offer mutual funds that come with trailer fees – which are in place to charge for ongoing advice. See the dilemma? DIY clients who purchase these mutual funds are being charged for advice they cannot and will not receive.
Recently, a proposed class action was filed against TD Asset Management Inc. regarding trailing commissions paid to discount brokers on TD mutual funds. The action claims damages of $200 million and other relief on behalf of all investors that have ever purchased a TD mutual fund through a discount broker.
Rob Carrick took some flack from investor advocates for claiming buyer beware, saying, “if you can’t research a simple mutual fund, you’re not cut out to be a do-it-yourself investor.”
The way I see it, this could be solved by either removing these funds from the menu of investing options available to online brokerage investors (only 7 percent of online brokerage holdings are in mutual funds), or with a pop-up warning that clearly states, “the fund you are about to purchase comes with a trailer fee designed to pay for advice you will not receive as an online brokerage client.”
This Week’s Recap:
On Monday I wrote about investing in retirement and shared my view on how much money you should keep in stocks.
On Wednesday Marie looked at building flexibility into your retirement plan.
And on Friday Marie shared some crucial information for last minute tax filers.
Weekend Reading:
Is it too dangerous to retire in Mexico? Here’s why some expats are discouraging new retirees from joining them in Mexico’s Lake Chapala.
Jonathan Chevreau reviews The Four Phases of Retirement, a new book written by retirement expert Riley Moynes.
A report quietly released by the Financial Consumer Agency of Canada warns mortgage specialists are incentivized to sell mortgages that yield higher commissions, with insufficient oversight.
In the meantime, March home sales fell 22.7%, with the national average price sliding 10.4% to $491,000.
Ben Felix explains how renters can meet or exceed the wealth of a homeowner:
Robo-advisor Justwealth examines the true cost of tax inefficiency when investing in a non-registered account.
If you don’t report the sale of a principal residence on your income tax return, you could be subject to a fine of as much as $8,000.
Tim Cestnick reveals the top 10 things the taxman may review on your tax return.
Bank of America tracked the downfall of the biggest asset-price bubbles in history less than one year out from its record and determined that Bitcoin is the greatest bubble in history, bigger than tulips, the South Sea Company and gold.
A great read from Michael Lewis, who says the idea that bitcoin will replace currency is ‘insane’.
Can you frugal your way to wealth? Or does it help to start from a privileged position? Here’s how the Frugalwoods made a name for themselves teaching millennials how to save money. Trouble is, you have to start with a lot of it.
Chris Taylor explains how game theory can have some real applications in your everyday life; from buying a car or a home, to negotiating a salary.
Will Disney destroy the movie theatre? An interesting read on how Disney is set to revamp its business model with a new streaming Netflix-style service.
Brian Banks rolled up the rim and won a Honda Civic. In this Maclean’s piece he shares the unexpected anguish of winning the prize every Canadian wants.
Michael James shares an entertaining tale of the couple who made millions beating lotteries in Michigan and Massachusetts.
Finally, not all side-hustles are created equal and this author explains why she became a Barre instructor – and why she quit.
Have a great weekend, everyone!
Did you file your taxes yet? You’re not alone. More than one-quarter of Canadians — 28 per cent — find the tax-filing process stressful, confusing and even intimidating, according to a TD survey.
Most Canadian income tax returns (and balances owing) are due by midnight April 30, 2018.
I’m a terrible procrastinator and I tend to wait until close to the last minute to file my taxes. If you’re like me, and haven’t filed yet, it’s time to buckle down and get a move on it.
Here’s what you should be doing.
File your taxes online
While some people still prefer to file paper tax returns, with only a couple of weeks to go, filing your return online is the best way to get your return to Ottawa. The CRA recommends and supports this method and has a list of certified software packages and web applications that fit all situations and budgets, including ones that are free.
Register for My Account and use the auto-fill function to have parts of your return automatically filled in with information from the CRA, including information from your T3, T4, and T5 slips.
File on time
Filing your taxes on time is always a good idea, even if you’re getting a refund.
If you have no income in the year, you still need to file on time because the government will use your tax return to assess whether you qualify for any provincial and federal credits such as the Canada child benefit, goods and service/harmonized sales tax credit, or child disability payments. Plus, you want to make sure there are no delays in receiving those benefits.
If you owe money, the CRA starts charging interest on the balance one day after the deadline passes.
What if you don’t have all your information?
If you don’t have a piece of key information you need to calculate how much you made last year or have missing receipts – file anyway. The CRA won’t grant you an extension (except in extraordinary circumstances).
Instead, use a best guess of your income. You can then file an amended return once you have all the information.
What if you owe money?
Of course, the CRA makes it easy for you to pay taxes owing. There are several payment methods to choose from. Did you know you can pay your taxes online? You can pay with cash or debit card at any Canada Post outlet. Your financial institution will also take payments, including online banking – the same way you pay your phone or hydro bill, and pre-authorized debits from your account.
Related: What if your tax return is reassessed?
Many taxpayers file late returns because they owe money and don’t have the funds to pay up. If you can’t pay all the amount you owe before the payment due date, consider making a payment arrangement. If you are eligible, a payment arrangement will let you make smaller payments over time until you pay the full amount. To set up an agreement, use My Account, or call the CRA at 1-888-863-8657
It may not be too late to get professional help
Do you think a professional can swoop in and save you? A tax advisor can help you file your taxes to ensure you are filing accurately and taking advantage of the appropriate deductions. Tax preparation professionals are all working late during this time, but some are already turning away new clients, so don’t leave it too long.
The CRA is a great resource to answer any of your questions.
If you need help and have a modest income and a simple tax situation, a volunteer from the Community Volunteer Income Tax Program may be able to file your return for you. You can find a clinic near you and see if you’re eligible.
If your tax return is late, you’ll pay a hefty price
If you owe tax, your payment needs to be received by the CRA on or before the tax deadline. If you are sending your payment by mail, the envelope with your cheque in it must be postmarked by April 30.
Late filing penalties are quite steep. The late penalty is 5% of your balance owing, plus an additional 1% for each month your return is late, up to 12 months.
The CRA charges penalties on the balance you owe, so if you can afford to pay even a portion of your balance, it’s a good idea to do so, and as soon as you can.