Accounting for your business and professional income on your personal tax return does have some complexities. However, using a professional accountant to help you navigate the return could be fruitful in the tax savings and provide piece of mind. Here are some things to consider.
Your sole proprietorship is required to report under the accrual method of accounting. This will require the inclusion of receivables as well as payables as at the end of the year.
Receivables are amounts owed to you at the end of the year. You may have worked up to the end of the year, however receive payments a few weeks later for that work. If the amounts were legally receivable, this will need to be included on your tax filings.
Similarly, payables should also result in a deduction. If you owed money at the end of the year, this should be deducted as an expense on your tax filings.
Work in Process (WIP)
Professionals need to include a portion of WIP as part of their taxable income. WIP is the work that has been done and yet to be billed to your client or patient. Prior to 2018 professionals could elect to not include WIP as part of their tax filings. This election is no longer available. Starting with the 2018 tax filing year, 20% of WIP must be included, with a 20% increase each year over the next five years. The WIP is measured at the lower of cost or fair market value.
GST/HST registration should be considered for services in which this is applicable and where revenues from all sources are in excess of the threshold amount of $30,000.
CRA uses industry codes to compare businesses. For instance, a trucker may have significantly higher fuel costs than a chiropractor – a trucker who mistakenly uses the industry code for a chiropractor is likely to have CRA audit their fuel costs. Therefore, it is important to use the correct NAICS code so as not to unnecessarily provoke an audit.
Internet Business Activity
If you earn income from internet activities, you are required to report the top five web pages you earn income from along with the percentage of gross income earned from the internet. Note that information only website is not included in this disclosure.
Loan Application Fees
Loan application fees are deducted over 5 years. This is meant to capture the term of the loan.
Meals and Entertainment
Meals and entertainment have a 50% limitation. As such, only half the meals and entertainment should be deducted. There are some exceptions to this rule.
Legal and Accounting Fees
If you are earning business or investment related income, your legal and accounting fees could be deducted against this income.
Capital Cost Allowance (CCA)
Where you purchase an asset for your business, you may not be able to fully deduct the cost of the asset in the year acquired. However, you can deduct the cost over time. The rate and timing of the deduction is determined by the CCA class of the asset purchased.
Motor vehicle may belong to class 10.1 or 10. Passenger vehicles belong to class 10.1, which have a $30,000 limit to how much can be deducted. As such, if the business purchases a passenger vehicle for more than this amount, the full deduction will not be allowed. Motor vehicles belong to class 10 and may be depreciated over time for the full cost. The tax definition of a motor vehicle and a passenger vehicle are different and should be considered when including a vehicle for purchase in your business.
Documentation of costs related to the vehicle will also be important. A personal use calculation may be necessary. To appropriately defend your tax positon, CRA appreciates actual receipts and a mileage log. The total receipts are multiplied by the actual percentage of total mileage used for business purposes to determine the business deduction verses the personal use of the vehicle.
If you have property in your business, the cost of the land and building should be separated. CCA is only available on the building. Buildings may fall under class 4 which allows a 4% deduction. However, there are additional allowances of 6% for manufacturing and processing as well as an additional 2% allowance for non-residential buildings. Note you cannot use the CCA for rental properties to bring the income from those properties into a loss position, however this is not necessarily on a per property basis. You may bel able to zero out a gain where multiple properties are owned. That said, there are reasons not to use CCA as this is optional. For instance, you may wish not to use the CCA if you are at a relatively low tax rate compared to anticipated future years.
Note that if you sell an asset, the proceeds of disposition should reduce the asset class. If the asset increased in value, you may only reduce the asset class by the original cost of asset.
Accelerated Investment Incentive
There is a new accelerated investment incentive available for certain eligible property. Businesses may immediately write off the full cost of machinery and equipment used for the manufacturing or processing of goods in CCA class 53 as well as clean energy equipment in CCA class 43.1 and 43.2.
In addition, certain eligible property may use up to one and a half times the net addition to the class for the year and suspend the half year rule.
These incentives are only available in the year of acquisition and must be available for use before 2028.
Planning is recommended as larger deductions upfront will result in less available to deduct in future years. You may be better off preserving deductions for higher earning years.
Business Use of Home
You must fall within the required guidelines to be eligible for a deduction for the business use of your home. Either:
- Your home office is the principal place of business, where more than 50% of your work is done or;
- The home office is segregated from the remainder of the home and soley used for the business AND is used to meet clients on a regular and ongoing basis (more than 2 times per week.)
If you meet either of the two criteria, you may deduct related expenses that are multiplied by the square footage of work space divided by the total square footage of your home.
The tax filing process also provides an occasion to strategize for tax planning opportunities. Shajani LLP Chartered Professional Accountants have a team of Calgary Accountants, Edmonton Accountants and Red Deer Accountants ready to assist you in your personal tax filings and tax planning strategy. Consider using us to file your tax returns.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.