Self-Employed: Business Income and HST
Self-employed individuals are usually proficient at their trade but are rubbish at record keeping and accounting. Unfortunately, CRA expects you to keep a professional set of records (capable of audit) and they demand that you act as an unpaid tax collector. Many individuals feel inclined to play games. They do jobs for cash in order to win contracts from clients who do not wish to pay HST. If you do this, you are still legally responsible for paying the HST even though you did not collect it. Lying on your tax return to reduce your income below $30,000 in order to avoid reporting HST is Tax Evasion. The penalties for this are significant fines and/or prison time.
Self-Employed Income – Form T2125
CRA requires completion of form T2125. For information on how to complete this form refer to the GUIDE. All numbers exclude HST. You claim the HST as an input tax credit (ITC) on your HST return. You cannot claim it twice. NOTE: Insurance does not have HST. It has the Ontario insurance tax. Your total cost of insurance is the premium plus the tax. Other items that do not have HST include bank charges (except for the cost of cheques purchased from your bank’s supplier) and Hwy 407 tolls. Remember that ALL invoices (yours and your suppliers’) MUST have the registrant’s HST number printed on the invoice/bill. T2125 does not have the gas for your vehicle included on it as a line item. All vehicle expenses are placed on a schedule and the total is carried forward to T2125. The schedule is PART 17 of the form T2125 above. Again, numbers should have HST removed. The whole basis of calculation is based on a percentage of business use of the vehicle versus personal use. We have written about this topic before. For CRA instructions see this posting.
Business Use of Home
If you work from home or use your house for a home-based office then you may be eligible for a deduction of a portion of the expenses. There are strict rules on how to do this. These are outlined in the guide (above) and the article in this link. You cannot claim any HST on home expenses as ITC on an HST return. You can however claim the full bill including the HST amount. Maintenance should be items like housecleaning and security and NOT major renovations. The way in which you calculate the amount to include is again based on percentages. If you have a dedicated office that is used only for business you can work off its measurements. If the office is 10ft. by 12 ft. it is 120 sq. ft. if the house is 2,000 sq. ft. the ratio is 120/2,000 or 6%. If you only use the room 50% of the time as an office and 50% as a bedroom, you reduce the amount by half and it is now 3%. TAX TIP – A common failing is to over-estimate the amount of time using the home office and the amount of space used. Being over aggressive on this deduction can and has resulted in a visit to your home by CRA to verify the facts. They will not only change your most recent return, they will apply the change they decide on to prior years as well. Cheating can be painful.
Suggestions for Reducing Grief at Tax Season
- You must register for HST as soon as your sales in any 12-month period exceed $30,000. You must collect and remit HST to the government. It is NEVER your money. You are collecting it for the government. Open a separate savings account and keep all the HST in there until you do the HST return.
- Save money for income taxes and CPP. As a self-employed person you are responsible for collecting and paying your own income tax and your CPP. Remember for CPP you pay your portion PLUS the employer’s portion so it can be a large number. Do not get behind because it is hard to recover. Pay tax by quarterly instalment. You can do this at the bank or through internet banking through the “pay bills” function. Always pay your WSIB on time if this applies to you.
- File HST annually. Filing quarterly is extra grief by way of bookkeeping. Be aware that when your annual HST remittance is greater than $3,000, CRA will require you to pay HST by quarterly instalments in the following years. The amount to pay is one quarter of last year’s total payment. Any adjustment +/- is done with the annual filing.
- Keep neat folders for EACH expense category: purchases, insurance, bank charges, wages, office supplies etc. If you wish to reduce the bill from your tax accountant, get an adding machine with a tape roll. They are inexpensive at Staples. Add the folder and attach your tape. Tax accountants charge by the amount of time spent on your file. Reduce that time and reduce your fees. NOTE: Add the NET amount BEFORE HST!
- If you buy assets such as equipment or vehicles, include the invoice and any finance documents.
If you keep tidy records, the tax and government stuff can be kept manageable by using professionals to handle all the stuff you hate. And remember – honesty is always the best policy as CRA will get you in the end if you cheat. You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn. Until next time, Ian