Six Basic Canadian Small Home Business Tax Tips That Can Save You Thousands of Dollars
Our Canadian small home business tax tips are just basic tax tips, but they should add up to $100's if not $1,000's in tax benefits. Our basic tips are conservative in nature, we know we probably could push the limits and write off a bit more, but we prefer to do our taxes in a way so that we don't have to pay an accountant to figure out all the numbers and we don't want to waste our time with an audit in order to save maybe $100 at most a year.
Tax Tip #1: This is not a money saving tip, but it is one of the more important tips. Get yourself a small filing drawer and some filing folders. Start with at least three folders. The first three folders will be labeled Expenses 2016, Income 2016 and Tax 2016. Might be obvious, but put all your income statements in your Income 2016 folder and all your expense receipts in your Expenses 2016 folder including the receipt for the filing drawer and folders that you just bought.
Tax Tip #2: This is a long tip, but a very important tip that can reduce your taxable income from your home business by more than $3,000 (it will depend on your housing expenses and office area, so it could be a lot less and it could be a little more). You can write off a portion of your home expenses based on the portion of your home that is used for your business. There are two ways to determine the percentage of home expenses that you write off.
The first method is done by measuring the square footage of your home office and dividing it by your home's square footage. If you are renting a small apartment, then this method will probably be your best option.
The second method is to divide the number of rooms in your workspace by the total number of rooms in your house. Note, bathrooms don't count as a room and you can't use this method if you have a finished basement (or at least an accountant told us that). If your basement isn't finished, this would probably be the best way to determine the percentage of business portion of your home. For an example we will use a three bedroom bungalow (one bedroom is converted into an office though), with a kitchen, a great room and without a finished basement. For this house your percentage of business portion would be (1 office ÷ 5 rooms) = 20% of your home. Note: This is assuming that you are only using your office for business purposes. If you do not use your home office exclusively for business, i.e. it's also used for personal purposes, then you have to further pro-rate deductible expenses by time, not just square footage. For example, 8/24 to account for 8 hours of business use during a 24 day.
The type of business use of home expenses that you might be able to write off will include;
- Home Insurance;
- Property Taxes;
- Mortgage Interest (Important Note: just the interest, not your principal aka not your full mortgage payment);
- Your Rent;
- Home Security;
- Water and Sewer;
- Regular Maintenance, for example carpet cleaning and furnace cleaning.
The list might seem excessive, but realistically if you were renting or building an office for your small business outside your home, then you would be paying these same exact expenses.
Note: The business use of home expenses can't create a carry forward loss to your business, the most that can be deducted will be to the point where your business has no net income.
Tax Tip #3: Write off your vehicle expenses. This tip can reduce your small business taxable income by a lot, but you must be using your vehicle for business (for example driving to a Tupperware party at your host's home, going to team meetings etc.).
This business expense can easily reduce your taxable income by hundreds of dollars, so be sure to keep good records of your expenses. Get a folder and write Car Expenses 2016. Keep all receipts for fuel purchases, car insurance, license and registration, maintenance, repairs, any interest paid on your car loan or any leasing expenses.
You will also have to figure out the percentage of use of your vehicle that you are using for business purposes. This part is very important. Keep a detailed log book of your travel.
First write down the odometer reading at the beginning of the year. Next, every time that you travel for business, write it down in your log book also reset the trip-odometer at the beginning of your trip and write down the distance in your log book at the end of your trip. At the end of the year, write down the reading on the odometer.
While filing your taxes, you will be asked what "Kilometres you drove in the fiscal period to earn business income", here you will write down the total of all your trips in your log book. Below you will be asked for your "Total kilometres you drove in the fiscal period", here you will take the end of year odometer reading and subtract the odometer reading at the beginning of the year.
You probably won't believe how much you can write off for business use of your vehicle. Even a modest 5% to 10% use percentage (which can be a little as one direct sales party every week or two) can reduce your taxes due by hundreds of dollars. Just remember to keep a detailed log book and keep all of your vehicle related expenses.
Tax Tip #4: Keep your receipts and/or invoices, don't rely on credit card statements.
Tax Tip #5: Be prepared to have a balance owning after filing your taxes. Even a small $3,000 in net taxable business income can create a decent sized balance due. Not only would the extra $3,000 be taxed at the bracket that you are in, but you will also be paying into the CPP, if you earned less than $54,900 with your day job. The self-employed CPP payment is twice the normal employee amount, because you also have to pay what your employer would normally pay. This works out to an extra 9.9% due, although half of the CPP payment will give you a tax reduction equal to the payment and half the payment will be issued as a tax credit.
For example; we will say that someone earns $46,000 in their day job in Manitoba and has $3,000 in self-employment income after his/her business deductions. The amount due on their $3,000 would be $1206.81 because, ($3,000 x 9.9%) = $297 CPP payment due and taxes due would be ($3,000 - ($297÷2 CPP Deduction)) x 33.25% tax rate - ($297 ÷ 2 x 25.8% CPP Tax Credit) = $909.81, so the total due would be $297 + $909.81 = $1206.81 total amount owning which is $1206.81 ÷ $3,000 = 40.2% what they earned with their self-employment income.
Let that last number sink in your head. For every dollar that the above individual reduces their business income by, they will get the equivalent of 40.2 cents back. For every $1 in lost receipts, you will be owing an extra 40.2 cents. If you forgot to write down a $1 discount that you gave to a customer, you will be owing an extra 40.2 cents. For every $1 of business use of your vehicle not noted in your log book, you will be owing an extra 40.2 cents at tax time. Forty cents might not be much and neither is a dollar, but many lost receipts, forgotten discounts and forgotten log book entries will add up into many more dollars donated to your Federal and Provincial governments.
Tax Tip #6: Use tax software, but make sure it has self employment forms. The tax software will guide you so that you won't have to remember what forms to pick up and how to calculate your amount due. A lot of self-employment tax forms are relatively easy to fill out, but it is also relatively easy to forget and/or make a mistake on a form. Don't forget to save the receipt, you can write it off as a business expense next year!
Tax laws and rules change all the time. It is your responsibility to ensure that you are doing your taxes correctly. This is not an exhaustive list either. One advantage to self-employment income is that you might be able to employ lower income family members. We didn't add that tip, because we believe if you are going to do that, you should talk to an accountant in order to make sure that you do it 100% correctly.
You shouldn't reduce your self-employment income to zero year after year. Doing so might cause the CRA to question whether or not your home business is a business or just a hobby that earns taxable income.
This article does not constitute legal tax advice and it is the responsibility of the reader to verify the information in the article.