TAX CONSULTING FOR SELF-EMPLOYED PERSONS
With the tax season already underway, taxpayers are constantly looking for ways to improve their tax situation. For self-employed workers, several expenses may be considered as long as they are incurred with the aim of earning a business income.
Here is a list of the most common expenses.
All expenses related to the use of vehicles for business purposes are deductible in proportion to business kilometres travelled with respect to total kilometres travelled. Be logical, because an overly high percentage could trigger a tax audit. The best way to support your car expenses is to keep a travel record.
The journey between your home and your place of business is considered as private. However, the business surcharge on your car insurance premium and parking fees are fully eligible for the deduction.
You can deduct all expenses related to a space of your home exclusively used for business purposes. These include rent or mortgage interests, municipal and school taxes, home insurance premiums, heating and electricity expenses, among other things. The monthly charge your basic residential line service is not deductible.
The area occupied by the office with respect to the total area will determine the deductible expense. Some maintenance expenses that apply only to the office space are fully permitted.
It is not recommended to deduct a capital cost allowance for the use of your work-space-at-home, as you will lose principal residence status for that part of the house when you sell it.
Only 50% of meals and entertainment expenses qualify as business expenses. Entertainment expenses are not limited to meals only, but also include tickets or subscriptions to shows or sporting events, box seats, rental of rooms or suites for entertainment purposes, and the travel and entertainment costs.
Golf fees, golf club memberships and sports club fees are never deductible. Meals and beverages consumed on the premises are subject to the 50% rule.
Beyond the 50% rule, Revenu Québec has also established an annual limit based on gross sales.
Sales of $32,500 and less: Limit of 2%.
Sales between $32,501 and $51,199: Annual limit of $650
Sales of $52,000 and over: Limit of 1.25%.
This limit does not apply to meal expenses incurred at a site located 40 kilometres or further from their place of business, but they remain deductible at 50%.
Social security costs
This is the expenditure that makes many self-employed workers startle after the first year in business. In fact, to calculate contributions to the Quebec Pension Plan (QPP), the self-employed worker is considered to be both the employer and the employee. He is required to pay an amount equivalent to 9.9% of his net business income, minus the basic exemption of $3,500.
In calculating the net income, half of the contribution is considered as a deduction, while the other half qualifies for a non-refundable tax credit at federal level. In Quebec, credit no longer exists since the increase in basic personal credit to $11,455 (for 2009).
All self-employed workers must contribute to the Quebec Parental Insurance Plan (QPIP).
Since 2009, it is possible to apply for Employment Insurance to claim health and compassionate care benefits (to support a family member suffering from a serious illness), but not to replace your income when you are unemployed. To benefit from it, you must voluntarily register a year before submitting your first application.
Nowadays, a computer is an indispensable tool. It is a capital expenditure and as such, it will be deductible over several years based on a rate defined according to the asset category.
Date of computer purchase
Rates after March 22, 2004, and before March 18, 2007: 45%.
Rates after March 18, 2007: 55%.
Rates after January 27, 2009, and before February 1, 2011: 100% (no half-year rule)
Capital assets are normally durable goods such as office furniture or layout and vehicles. There are several asset categories and the annual expenditure is calculated based on a percentage to account for the lifespan of the asset.
Do I have to register for taxes?
If your total taxable sales or services in Canada exceed $30,000 per year, you will have to register for the GST and QST. Below this turnover, you may or may not register.
A simple and easy way for self-employed workers with low expenses and taxable income under $215,000 (GST and QST included) is to register for the quick method.
You only pay a set percentage of taxes collected on your sales and do not claim any credit on your taxable expenses, except for capital assets. However, the unclaimed credit on your taxable sales or services will be added to your income at the end of the year.
People who provide legal, accounting, bookkeeping, actuarial, financial or tax consulting services, or who prepare tax returns cannot use this method.
Unlike employees, your tax preparer's invoice is considered to be an accounting expense in your business expenditures.
Managing your business
To ensure that you have claimed all the expenses and tax credits to which you are entitled, you must keep your accounts strictly. Do not wait until the last minute before your visit to your tax advisor to gather up all your receipts. You may forget several of them.
Your credit cards statements are not sufficient to support your expenses. Always have your receipts, supporting documents and information of all your expenses at hand. Keep your documents for a period of six years beyond the end of the year to which they relate. For better control, it is strongly recommended you open a business bank account which is different from your personal account.
Note that the deadline for filing the income tax return for a self-employed worker and spouse is June 15.
However, interests will be calculated on any outstanding balance, starting May 1. For workers concerned, it is advisable to make instalment payments as early as the first year.
IMPROVING YOUR TAX SITUATION
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