When you started your own business, it’s likely your main goal wasn’t to become a whiz at taxes. But understanding the tax benefits of being self-employed can help you save money, stay organized, and free up valuable funds you’d otherwise have to put aside for tax time. 

Taking into account the extraordinary circumstances of the past couple of years and claims you may need to consider if you took advantage of the federal and provincial relief programs last year, here’s some tips and information to help you with your taxes this year.  

Relief program claims

From the 10% temporary wage subsidy to programs like CEWS, CECRA & CERS, to any provincial subsidy received, you are required to ensure you are claiming what you have used.  

If you took advantage of CEBA or HASCAP in 2021, the proportion of the loan you are eligible to write off will need to be included as part of your income tax return as it constitutes taxable income. There are some exceptions, however, which can be found on the CRA website. 

Additional sections have been added to T4 slips to validate some of the payments made through programs like CEWS, CEBA and CESB. For the list of codes, visit the CRA website.

Know your deductions

From home office and travel expenses, to interest on loans and accounting fees, be aware what you can deduct from your income. These are items you genuinely need to keep your business going. Here are just a few things you can deduct from your income:

• Some COVID-19 supplies (check the CRA income tax guide for full details)
• advertising
• business start-up costs
• home office expenses (see more below)
• insurance
• interest and bank charges
• maintenance and repairs
• meals and entertainment
• legal and accounting fees

For a complete list, check out the Canada Revenue Agency (CRA) website.

Use accounting software

There are many different versions of accounting software on the market, most of which are designed for individuals you aren’t necessarily well-versed in accounting. Take advantage of these time-saving tools that can quickly help with things like reporting how much income tax you owe. Options include:

• FreshBooks: this popular software is known for its ease-of-use, particularly for individuals unfamiliar with accounting in general
• Sage Business Cloud: with several options of software depending on the needs of your business, Sage Business Cloud has excellent reporting features and ways to stay on top of taxes
• Zoho Books: one of the less expensive options, Zoho Books still packs a punch when it comes to keeping your finances under control
• FreeAgent: a sleekly-designed software created specifically with small businesses in mind, FreeAgent can help manage everything from cash flow estimates to payroll
• Xero: this robust application takes the hassle out of a variety of accounting-related challenges, including project time tracking, inventory, and bank reconciliation
• QuickBooks: a long-standing option for sole proprietors, partnerships, corporations, and non-profits, QuickBooks offers a free, 30-day trial for new users

Claim home office expenses

As we mentioned, if you work out of a home you own or rent you are eligible to claim a portion of your expenses against your income. But did you also know you can claim heat, home insurance, electricity, and cleaning materials? Other home office-related expenses you can claim include:

• Wi-Fi
• telephone
• vehicle expenses
• software
• capital cost allowance
• property taxes
• mortgage interest

Again, the CRA website is a great resource for understanding home business deductions — it even has a handy example of how to calculate your business-use-at-home expenses for tax time.

This year your employees may be able to claim office expenses and home office use necessitated by the pandemic using either a detailed method or flat rate method. As the employer, you will need to supply your employee with a T2200 or T2200S. 

Set money aside

Whether you are self-employed or work for someone else, you still need to pay income tax and CPP every year. When you work for someone, you don’t have to be concerned with applying these deductions since your employer takes care of that.

But if you are self-employed, it is a best practice to set money aside for taxes from any and every cheque that comes in; otherwise you will be stuck with a large tax bill at the end of the tax year. It is suggested that you set aside a minimum of 25 percent of your income for tax and other contributions, like RRSPs.

Keep records for 6 years

It is important to keep any receipts and records of your income and tax information for at least 6 years. On the off-chance you get audited you will need record of your income, expenses and the amount of tax you paid (and collected) — six years is the maximum amount of time the government can look back in your records.

Get advice

As we have pointed out corporate taxes can be complicated, and 2020 and 2021 tax filing will likely be even more complex. Meeting with an accountant or bookkeeper even once a quarter will help manage your finances — and they can even help ensure you aren’t paying too much in tax.  

The cost of an accountant or bookkeeper can more than pay off as they likely know exemptions, opportunities, and tax advantages that you may not be aware of. There is a good reason why they are called professionals! You can also claim your accounting and bookkeeping fees as business expenses. 

A payroll partner like ADP can also help ensure you are up to date on changes that impact employees and will do your T4 slips for you.  

Are you a sole proprietor? CRA offers a free one-on-one review and consultation to ensure you are not missing any financial opportunities. 

Taxes will always remain part of business, so be sure to arm yourself with the knowledge to take advantage of all the tax benefits of being self-employed! Not sure where to start? Our Business and Commercial Banking Advisors are here to help, so get in touch today.  
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