Home Business Income Taxes in Canada
Working from home is an easy commute in the morning and since it is your principal place of business, you may be able to claim some of your home expenses. As a home based-business, you are self-employed and report your business income and expenses in the same way as any other business. Depending on the amount of space you use for business and/or client meetings, you can claim a prorated portion of your utility payments, property taxes, mortgage interest and maintenance costs. It is important to remember, only mortgage interest is deductible – not your mortgage principal.
In Canada, self-employed people do have a little bit longer to file a tax return – until June 15. However, if you owe the government money and file after April 30th, they will start adding on the interest. As you prepare your paperwork for your tax return, here are some deductions to keep in mind:
Office supplies like paper and staples are fully deductible. Bigger items such as computers and office furniture must be depreciated over a number of years according to the Capital Cost Allowance (CCA) rules. CCA rate for computers and computer equipment was increased to 55% effective March 19, 2007. Don’t forget you can only deduct half the annual rate in the first year. So if you purchased a computer for $1,000, you would only be able to deduct $275 against your business income in the first year. In the second, you can deduct 55 per cent of the balance remaining, or $398.75 (calculated as $725 x 55 per cent).
For 2009, computers may be written off 100% in the first year as part of Canada’s economic stimulation package.
You are allowed to claim a portion of your auto expenses that relate to the home business. This includes gas, maintenance, auto club membership, license fees and insurance. It is important to document vehicle use for both personal and business travel so invest in a log book or record system to keep track. The rules may change for 2008 based on the last Federal Budget. There are limitations on how much you can claim for luxury vehicles. The ceiling on CCA claims for 2007 is $30,000 plus GST and PST. And if you want to lease, the ceiling is $800 per month plus GST and PST.
Insurance and health benefits are another concern for self-employed people including those in a home business. If you opt to pay for a private health service plan, you may be able to deduct the premiums as a business expense. To qualify, either your self-employment income must be 50 per cent of your total income or your income from other sources must be $10,000 or less. The maximum deduction is $1,500 for yourself, $1,500 for your spouse or common-law partner, and $750 for each or your children under 18.
Remember to keep all your receipts, just in case you are ever audited. Some sort of accounting software is highly recommended to help you to keep track of your revenue and expenses in an orderly manner.
And watch those deadlines to ensure that you do not have any interest or penalties on any tax owing.
Mark Styranka writes on a variety of topics primarily relating to small business. To learn more, Mark recommends that you visit: http://www.MajecAccounting.com
http://www.MajecAccounting.com/blog
Income Tax FAQ:
Question: Currently on welfare, do I get any money back when doing my income tax?
I moved out of my ex’s place last year with my son, and currently going to college. I was on social assistance starting July 2009. When I file my income tax, will I be getting any money back or not?
Answer: When I lived in Ontario, had dependents and was on welfare (15 years ago) I did get back a small amount. It was like $300 for claiming my rent receipts. You can figure out yours, for free, at ufile.ca, without filing. Low income families can file for free too.
Question: I live in Ontario Canada and wondered if anyone knew if you can claim an adult child at home with no job?
I have a 22 year old son living at home with no income. If anyone knows about claiming them on their income taxes please send me a link to the government website to where I can find this information.
Answer: You can only claim him if he is a full time student or disabled.
Question: Investment in U.S. Securities and paying taxes in Canada?
If one’s employed in Canada (Canadian Citizen) but invests in U.S. securities, such as stocks, how are the gains (Capital and Dividend) treated for tax purposes?
Of course, the funds are traded in U.S. Dollars and the gains are also in U.S. Dollars; would the U.S. gains be considered differently as U.S.Income at a different Marginal Tax rate or will they be taxed at the same Marginal rate as the Canadian Dollar Income?
Answer: While there is US withholding on dividends paid, there is none on capital gain. This is the rule for ALL US Dollar income: you convert the US Dollars to Canadian Dollars at the rate in effect on the day of buy, sale, or dividends paid. Then you report it, on the appropriate lines of Schedules 3 or 8. You are then taxed on your TOTAL world income, at one tax rate.
Question: Can I claim the tax credit for supporting my parents?
My parents are living with my family and have no financial income. I’m in Ontario, Canada.
Answer: The information is at the CRA website in the General Income Tax Guide under line 315 of Schedule 1. You’re looking for the Caregiver amount.
If your parents are over 65 and have income of less than $16,000.00 or if one or both of your parents are under 65 but qualify for the disability tax credit you or your spouse (if you have one) may be able to claim one or both. See your tax preparer for more information.
Question: Reporting Income (foreign income and T2125 self employed)?
I live in Canada and am self-employed. I work in the USA most of the time, therefore I pay taxes to the IRS (I do a US tax return). When I report my income, which is foreign income, do I report on line 104 other employment income and/or on T2125 as income as well? Also, same questions for tax paid to the USA, where on the Canadian forms do I report this as a self-employed person? I would like to deduct some of my expenses, I assume I do this on T2125.
Answer: You’re self-employed, so the income and deductions are most definitely reported on a T2125. The net result is written on your return at line 135.
When it comes to the income taxes paid in the states, there is a tax treaty between Canada and the US that basically prevents double taxation of your profit. However, the US probably has first crack because that’s where you earned your income. Fill in a form T2209 in order to claim foreign tax credits. In addition, you may need a form T2203 in order to avoid paying provincial taxes on the amounts of income if your business was permanently established outside the country.
Question: Canadian Taxation for a Temporary Resident?
I want to know what happens to my income deductions as a Temporary resident? I am an Australian on a Working Holiday visa being paid a full-time employee in Toronto, Canada, and apart from the Federal Income Tax, I have 1.7% and 4.7% being deduced from my gross income for EI and CPP. What happens if I never claim my EI before I leave Canada? What happens to my CPP? I do not envisage at this stage retiring in Canada, so can I claim some of that back?
Answer: EI is the insurance you paid for your Employment. It is not refundable. CPP can be withdrawn if Australia has a treaty with Canada regarding it. Check with a professional to find the right answer.
Question: Business Tax Question, I need help please!?
I opened a business in October, online retail, so my investment in the business was about $30 000.00. Since it recently opened it’s profit has only been around $200.00. How will taxes work, will I owe, get back, etc? I am in BC Canada. Also, the business is solely in my name, so how will it effect my husbands taxes? Up until now he had been able to use me as a deductible, will he still be able to because I have not made an income, or not?
Answer: You need to sort out what part of this $30K is expenses and what is start-up costs. Expenses are directly deducted from income. Start-up capital costs, such as franchises or licenses are not; they are depreciated over time.
If, after this, you still have a profit in the business, it will be deducted from your husband’s Spousal Amount of Non-Refundable Tax Credit.
Question: U.S.-Based Gift contributions (Donations) in Canadian Taxing System?
I’m aware that donations made to a U.S. registered charity organization are tax-deductable from U.S.-Income even for a Canadian Citizen. I’m not sure how this is classified though.
Assume one makes monthly donations to a particular registered institution in the states but earns income in Canada and in the Canadian Currency(CND) but also invests in U.S. equities and earns some U.S dollars. Now will the deductions work towards the U.S dollar income earned through equities? or there are other criteria to consider?
Answer: If your US dividends are US income, yes, you can deduct up to 75% of that as charitable contributions. You will be converting everything to CAN$ on your return, so what currency is earned is not the issue. Line 2 on Schedule 9 will need an attached explanation of how you computed allowable donations.