We’re approaching the deadline to file income taxes for salaried employees in Canada. This year, the tax deadline in Canada is April 30th, with the deadline for self-employed individuals falling on July 17th. However, if you owe taxes, you have to pay up by April 30th.
Since most self-employed people don’t get tax withheld from their income, it’s very likely that you will owe taxes. It’s best to just get your taxes out of the way as soon as possible.
But self-employed taxes are some of the most complicated forms you can fill out. It can be hard to understand which deductions you can and can’t qualify for, or to find any hidden tax breaks. That’s why we compiled this list of tax tips, so you can spend less time researching Canadian tax law and more time running your business.
1. Little Known Claims
You run a business, but you are not your business. Although it can feel like your business is your whole life, you still have to separate your personal expenses from your business ones.
You probably already know that you can deduct the cost of a home office or a car lease if it’s used for business. But do you know exactly how much you’re allowed to claim?
Your home office counts as any room or rooms in your home that are dedicated to business endeavours. That can include a home office (or multiple home offices), storage space for tools or equipment, and workshops. You can’t claim your entire home as a home office, though. You’re only allowed to claim the portions of your home that are used for business.
To calculate how much of your home counts as a “home office,” measure the square footage of all the rooms in your home and divide that by your house’s total square footage. For example, if you have a 2000 sq. ft. home and your home office is 400 sq. ft., your ratio is 20%. That means you can claim 20% of your housing-related costs as a business expense. That includes heating, mortgage interest (not the principal portion of your payment), utilities, home insurance, and property taxes.
A similar theory applies to your car. You’re allowed to claim operating costs up to the portion of your car that you use for business purposes. If you drive mostly for yourself and occasionally do a sales call, you won’t be able to claim your whole car.
Be sure to keep an accurate log of all your car’s business trips, including the odometer before leaving and after arriving. Also be sure to keep all your gas station receipts and oil change logs. You can claim gas, maintenance, and even car insurance!
Incorporation won’t help you save taxes until your business is making more money than what you need to live off. If your business is only bringing is as much as a salary would, after expenses, then incorporating won’t save you any money on your taxes.
But if your business earns $100,000 and you only need $50,000, leaving the remainder in your business can cut your taxes by a lot. Not quite half, but still a good amount.
The reason incorporation can save money when your business is doing well is because businesses are more favourably taxed than individuals. At a $100,000 salary in Ontario, you can expect to pay about $24,400 in taxes, plus another $3,400 in CPP/EI payments. If you instead made just $50,000, you would pay only $8,000 in taxes and an additional $3,000 in CPP/EI.
If you’re not incorporated, and are running a sole-proprietorship, you can’t separate your business income and personal income – because it’s the same. You would have to pay personal income on the full amount.
If instead you incorporated, your small business would pay 3.5% on the first $500,000 in income in Ontario, which is far less than the average tax rate of 27.86% you’d pay on $100,000.
So if you were to incorporate and pay yourself $50,000 out of that $100,000, your business would pay 3.5% tax on $100,000 (equal to $3,500), then you would pay personal tax on your $50,000 (about $11,000 if you include CPP/EI), for a grand total of roughly $14,500.
3. Income Splitting
Once you’re incorporated, you have a few more options for saving money by enlisting the help of your family.
By employing family members, you can deduct their income as an expense of the business. That’s money you don’t have to pay any taxes on. Then, when your family member claims that income on their taxes, it’s taxed at a lower rate than your income would be.
If there’s no reasonable work for your family members to do for your business, then you can’t do income splitting. The work they do must be reasonable, according to the CRA, so you can’t pay them $1,000 a day for answering the occasional phone call, or doing nothing at all.
If you can’t make your family members employees, you might instead be able to make them shareholders and pay them dividends. Both the corporation and the recipient of the dividends would have to pay tax, but dividends are tax-advantaged in Canada, which means you can still end up saving money after all is said and done.
4. Delaying Losses
If you know anything about capital gains, you know that you can carry forward capital losses to offset future capital gains income.
The same can be said for your business. In the early years, when you’re likely to be operating at a loss, you can use those losses to offset income from other areas, such as your full-time job.
If you’re unincorporated, you can use losses to offset personal income. If you’re incorporated, you can use losses to offset future business income, as losses remain within the company.
If you’re self-employed and looking for other ways to save money, you should consider also contributing to your RRSP. This is an easy way to both defer your taxes and save for retirement. The deduction is equal to the amount of money you put in your RRSP, so calculating your deduction is easy.