2013 Personal Income Tax Questionnaire – Self-Employed Business
Today’s article relates to question #4 on the 2013 Personal Income Tax Questionnaire sent to clients.
DO YOU HAVE A BUSINESS?
This article is an attempt to give you an overview of certain aspects of reporting self-employment income.
If you are self-employed and unincorporated (proprietorship or partnership), you will need to file a form T2125 (Summary of Business, Profession and Commission Income and Expenses) when you file your personal income tax return for 2013. Please note, business income reported on a T2125 does not include farming or fishing income, farming and fishing income require form T2042 and T2121, respectively.
DATES TO REMEMBER:
February 28, 2014 – if you have employees, you are required to file (and distribute to your employees) any 2013 T4 and T4A information returns by this date.
April 30, 2014 – although self-employed individuals receive an extension in their filing deadline to June 15, 2014, any tax owing is due on April 30th. Any unpaid taxes begin to accrue interest after this date.
June 15, 2014 – this is the 2013 filing deadline for self-employed individuals. If taxes are owing, failure to file by this date may result in the CRA assessing penalties based on the amount of taxes owing.
June 30, 2014 – if you are in the construction industry (more than 50% of your income is derived from the construction industry) and you have hired subcontractors (not employees), you are required to file any 2013 T5018 information returns by this date (6 months after your year-end).
IS GST APPLICABLE?
There are three classifications of income for GST purposes: Taxable, Exempt and Zero-rated.
1) Taxable is best described as any goods or services that are not exempt or zero-rated – the majority of goods and services are taxable
2) Exempt are good and services where no GST is charged and they tend to be basic necessities (ie. medical care, basic groceries and residential rent)
3) Zero-rated are goods or services that are normally taxable but are taxed at a 0% rate (vs being exempt) – a good example are sales to the US.
If your business income is in excess of $30,000 and your income is considered “taxable” for GST purposes, you are required to collect GST. Even if you are not required to collect GST (below $30,000 in sales or zero-rated goods), it may be advantageous for you to registered for GST purpose, in order to claim a refund of the GST you pay (ITC’s).
IS PST APPLICABLE?
If you sell GOODS (not services) in BC (outside BC see Questions and Answers – Selling outside of BC) and your gross income is in excess of $10,000, you most likely have to charge PST – though exemptions exist.
BUSINESS INCOME (RE: SLIPS):
Depending on what type of self-employment income you are reporting, you may receive information slips summarizing income you have earned from certain individuals or corporate entities for the 2013 calendar year. Even if you have already included the income listed in those slips in your gross earnings, it is important that you submit those slips with your business records. Those slips should to be inputted and their totals carried forward to the T2125 schedule to ensure the CRA is aware that your gross income does in fact include those amounts, otherwise the CRA may reassess your return to include them (resulting in that income being double counted and requiring additional time and costs to correct for the error).
The most common self-employment information slips are:
1) T1204 (Government Service Contract Payments)
2) T5018 (Statement of Contract Payments)
3) T4A (Statement of Pension, Retirement, Annuity and Other Income)
BUSINESS EXPENSES (WHAT IS DEDUCTIBLE?):
The CRA states that “As a rule, you can deduct any reasonable current expense you paid or will have to pay to earn business income.” The CRA goes on to list the major expense categories on their business expenses page.
Below, I have linked to the front and back of a small brochure I created for the specific purpose of helping people with questions related to business expenses. The brochure advises self-employed individuals on how to organize their receipts, so as to minimize the cost to have a T2125 prepared as part of their personal tax return.
The brochure looks at:
WHERE are your receipts hiding
WHY taking the time (to organize your receipts) can pay off
HOW to organize your receipts
WHAT expense categories you should use
TECHNOLOGY receipts management tools
SOME FINAL NOTES:
1) Motor vehicle expenses – you have to use actual expenses – only employees are allowed the simplified cent per km rate as part of an employment contract.
I looked at this issue in Questions and Answers – Vehicle expenses vs per km rate for Independent Contractors (Self-employed)
2) Business use of home – if you are a home based business, this can be a significant deduction. If you are not a home based business, this is still available and a worthwhile deduction based on certain criteria.
An interesting article worth reading is Home office expense claims coming under closer scrutiny
3) Reasonable expectation of profit – it’s important to remember that consistently reporting a loss from self-employment income can draw the CRA’s attention and they may disallow those losses, if they feel there is no “reasonable expectation of profit”.
The CRA even has specific criteria which “should be considered when determining whether an activity engaged in by an individual has a reasonable expectation of profit“. You can review their criteria at Application of Profit Test to Carrying on a Business
If you have any questions about anything, please feel free to email me at email@example.com or post a comment below.