If you are self-employed and you use your personal vehicle to earn business income, you can claim your vehicle expenses in your income tax return. You can only claim the business portion of vehicle expenses. The personal portion of vehicle expense is not deductible. To claim your vehicle expenses correctly, please follow the following steps.

Keeping records

You can claim your motor vehicle expenses only when they are reasonable and you have receipts to support them. You should keep a record of the total kilometers you drive and the kilometers you drive to earn business income.

For each business trip, list the date, destination, purpose, and number of kilometers you drive. Record the odometer reading of each vehicle at the start and end of the fiscal period.

If you change motor vehicles during the fiscal period, record the dates of the changes and the odometer readings when you buy, sell, or trade the vehicles.

Claim your vehicle expenses, which include:

• licence and registration fees;
• fuel and oil costs;
• insurance;
• interest on money borrowed to buy a vehicle. When you use a passenger vehicle to earn income, there is a limit on the interest you can deduct. To calculate the amount of interest you can deduct, complete “Chart B – Available interest expense for passenger vehicles” on page 6 of Form T2125.
• maintenance and repairs; and
• leasing costs to lease a vehicle you use to earn income. When you use a passenger vehicle to earn income, there is a limit on the amount of the leasing costs you can deduct. To calculate your eligible leasing costs, complete “Chart C –Eligible leasing costs for passenger vehicles” on page 6 of Form T2125.

Claim capital cost allowance (CCA) on your vehicle

If you use a motor vehicle you own in your business, you might be able to claim CCA as vehicle expense in your self-employed business. To claim CCA on your vehicle, please follow the following steps.

1. What type of vehicle you own.

There are two types of vehicles:

• motor vehicles include pickup truck, van or minivan used to transport goods or equipment.
• passenger vehicles include Coupe, sedan, station wagon, sports car, or luxury car and Van or minivan with 4 to 9 seating.

2. CAA Class of your vehicle.

Motor vehicles belong to Class 10, with a CCA rate 30%. Your passenger vehicles can belong to Class 10 or Class 10.1, which all have a CCA rate 30%. If the cost of your passenger vehicle before HST is more than $30,000, it belongs to Class 10.1. You should list Class 10.1 vehicle separately. The $30,000 amount plus HST is the capital cost limit for a passenger vehicle to claim your vehicle expenses.

3. Calculate CCA as your vehicle expenses

To calculate your tax deduction for CCA, and any recaptured CCA and terminal losses, use Area A on page 5 of your Form T2125.

For example, Mike bought a passenger vehicle with a cost $33,000 plus HST $4,290. Mike has to put this vehicle in Class 10.1 since it cost him more than $30,000. The maximum capital cost he can claim for this vehicle is $33,900 ($30,000 x 1.13).

For the first year, the maximum CCA he can claim is $33,900 x 30% x 0.5=$5,085. (the half-year rule applied). The second year, the maximum CCA he can claim is ($33,900 – $5,085) x 30% =$8,644.5.

Continue with the previous article What you can deduct as self-employed business expenses – part 1, the following are more elf-employed business expense you can deduct on your income tax return.

Legal, accounting, and other professional fees

You can deduct the fees you for professional advice or services, including consulting fees. You can deduct accounting and legal fees to get advice and help with keeping your records. You can also deduct fees for preparing and filing your income tax and GST/HST returns.

You cannot deduct legal and other fees you incur to buy a capital property. Instead, add these fees to the cost of the property.

Management and administration fees

You can deduct management and administration fees including bank charges incurred to operate your business.

Rent as self-employed business expenses

You can deduct rent for property used in your business. For example, you can deduct rent for the land and building where your business is situated.

Maintenance and repairs

You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn income. However, you cannot deduct the value of your own labour.

Salaries, wages, and benefits

You can deduct gross salaries and other benefits you pay to employees. Salaries or drawings paid or payable to you or your business partners are not deductible.

You can deduct the salary you pay to your child or your spousal, as long as you meet all these conditions:

• you pay the salary;
• the work your child or your spousal does is necessary for earning business or professional income; and
• the salary is reasonable when you consider your child’s age, and the amount you pay is what you would pay someone else.

Keep documents to support the salary you pay your child or your spousal.

Report the salaries you pay to your children and spouse or on T4 slips, the same as you would for other employees.

Property taxes

You can deduct property taxes you incurred for property used in your business. For example, you can deduct property taxes for the land and building where your business is situated.

Travel expenses as self-employed business expenses

You can deduct travel expenses you incur to earn business and professional income. Travel expenses include public transportation fares, hotel accommodation, and meals.

Telephone and utilities

You can deduct expenses for telephone and utilities, such as gas, oil, electricity, and water, if you incurred the expenses to earn income.

Delivery, freight, and express

You can deduct the cost incurred in the year of delivery, freight, and express that relates to your business.

Computer and other equipment leasing costs

If you lease computers, cellular telephones, fax machines, and other equipment, you can deduct the percentage of the lease costs that reasonably relates to earning your business income. You can also deduct the percentage of airtime expenses for a cellular telephone that reasonably relates to earning your business income.

Leasing costs as self-employed business expenses

You can deduct the lease payments you incurred in the year for property used in your business.

Convention expenses

You can deduct the cost of attending up to two conventions a year. The conventions have to:

• relate to your business or professional activity; and
• be held by a business or professional organization within the geographical area where the organization normally conducts its business.

It can be tough being self-employed since you have to look after every aspect of your business. However, you can deduct your self-employed business expenses, which an employee can’t. That will help you save a lot of taxes.The following are the most common self-employed business expenses you can deduct in your income tax return.

Subcontract

It includes all the costs of hiring outside help to perform tasks for your business. Subcontractors are not your employees. You can submit T4A slips to CRA to report the subcontracts fees you pay or will pay. If you are in the construction industry, you should use T5018 slips instead.

Advertising

You can deduct expenses for advertising, including advertising in Canadian newspapers, television and radio stations.

Meals and entertainment

Entertainment expenses include tickets to an entertainment or sporting event, gratuities, cover charges, and room rentals such as for hospitality suites.

You can claim meals and entertainment as self-employed business expenses as long as they have a legitimate business purpose. However the maximum amount you can claim is 50% the amount you paid. These limits also apply to the cost of your meals when you go to a convention, conference, or similar event.

There are several exceptions to this 50% rule.

• Your business regularly provides food, beverages, or entertainment to customers for compensation (for example, a restaurant, hotel, or motel);
• You pay meal and entertainment expenses for a Christmas party or similar event, and you invite all your employees (note that you are limited to six of these events each year);
• 80% of expenses for food and beverages consumed by a long-haul truck driver during an eligible travel period are deductible.

Bad debts

You can deduct bad debts as self-employed business expenses if:

• you had determined that an account receivable is a bad debt in the year; and
• you had already included the receivable in income.

Insurance

You can deduct all commercial insurance premiums on any buildings, machinery, and equipment you use in your business. In most cases, you cannot deduct your life insurance premiums as self-employed business expenses.

Interest as self-employed business expenses

You can deduct interest on money borrowed for business purposes or to acquire property for business purposes.

You may be able to deduct interest expenses for a property you used for business purposes, even if you have stopped using the property because you are no longer in business.

Business tax, fees, licences, dues, memberships, and subscriptions

You can deduct all annual licence fees and business taxes you pay to run your business. You can also deduct annual dues or fees to keep your membership in a trade or commercial association.

You cannot deduct club membership dues (including initiation fees) as self-employed business expenses if the main purpose of the club is dining, recreation, or sporting activities.

Office expenses as self-employed business expenses

You can deduct the cost of office expenses. These include small items such as pens, pencils, paper clips, stationery, and stamps. Office expenses do not include items such as calculators, filing cabinets, chairs, and desks. These are capital items.

Supplies as self-employed business expenses

You can deduct the cost of items the business used indirectly to provide goods or services (for example, drugs and medication used by a veterinarian or cleaning supplies used by a plumber).

Starting your own business is exciting, and it can bring your big rewards in the future. However, it also means you are taking more responsibilities. Setting up your startup business taxes is one of them you have to take.

First, make sure you have a business, not just a hobby.

An unprofitable business can be a tax shelter. If you have another income, you may be able to use your business losses to offset your other taxable income and pay less tax. However, CRA may believe your “business” is just your hobby, and deny your business deductions, especially if you are losing money years after years. If you fail to prove you are really running a business, you have to pay back all taxes plus interest and penalty.

According to the CRA tax code, “a business is an activity that you intend to carry on for profit and there is evidence to support that intention.”

To prove you are really running a business, you should do the following.

• Keep Good Records – Track each expense with as much detail as possible. Keep your business accounts completely separate from your personal ones and maintain an accurate spreadsheet of all expenditures.
• Show Your Marketing Efforts –Make sure you keep copies of all of your marketing materials so you can show it to CRA. This includes business cards, flyers, newspaper ads, online ads, etc.
• Run A Legit Business – Make sure you register for all the necessary permits and licenses to run your business. If you do everything strictly by the book, you are showing CRA that you are putting your best efforts to make your business profitable.

Secondly, choose the right type of business for your startup business.

Your startup business taxes are highly affected by the structure of your business. The two most common types of business structure are:

1. Self-employed

If you are running a business and you haven’t incorporated it, you are self-employed. If you have a business by yourself, CRA consider you have a sole proprietorship. If you have a business with a partner, CRA consider you have a partnership.

Advantages for self-employed

• Your business losses can be written off against your other income.
• Setting up your business is easy and the costs are low.

Disadvantages for self-employed

• Unlimited liability. You are liable for all debts and other liabilities of the business. If your business is sued, all your business and personal assets are at risk.
• If your business is profitable, you will usually have to pay higher taxes than if it was incorporated as a Canadian Controlled Private Corporation (CCPC).
• Business loss cannot be carried forward.

To report your startup business taxes as self-employed person, you should use tax form T2125 in your T1 General Return.

2. Corporation

You can set up your business as a corporation by completing articles of incorporation, and filing them with the appropriate provincial or federal authorities.

Advantages for corporation

• Limited liability. This means that the liability is usually limited to the amount that you have invested in the corporation.
• If your corporation is profitable, you will pay tax on a much less tax rate then your personal tax rate.

Disadvantages for corporation

• Business losses cannot be written off against your other income.
• Higher setup and administrative costs

To report your business tax as a corporation, you should use tax form T2 – Corporation Income Tax Return.

Third, keep good business records for your business taxes

You are required by law to keep records of all your transactions to support your income and expense claims. You report business income by using the accrual method of accounting. With this method, you:

• report your income in the period you earn it, regardless of when you receive the income; and
• deduct expenses in the period you incur them, whether you paid them in that period or not. Incur usually means you either paid or will have to pay the expense.

Keep your records and related vouchers for a minimum of six years. If you do not keep the necessary information and you do not have any other proof, CRA may have to determine your income using other methods. They may also disallow expenses you deducted if you are unable to support them.

Are you running a small business? If so, you don’t need to tell us how busy you are. Whether you are a self-employed contractor, a sole proprietor, or a corporation director, there are always too many jobs to do and too little time to do them.

Business taxes are one of those jobs, maybe the one you like the least.

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But there’s one thing Big Dave can’t joke about, and that’s his business taxes. He’s missed several tax filing deadlines, and he’s so far behind it’s starting to keep him up at night. He is afraid he’s going to receive a huge tax bill, which he’ll be unable to pay.He even lies in bed imagining a tax office breaking down his door and arresting him for back taxes, with TV trucks parked outside his house to record the whole incident for the evening news. The anxiety is starting to affect his personality, and he’s stopped telling his corny jokes.

Big Dave got into this mess because he hated dealing with his tax accountant. The man had no sense of humor, and conversations with him were as much fun as a head cold. The accountant wasn’t good about returning phone calls, and when he did it didn’t help matters — his long-winded explanations almost put Big Dave to sleep. It was such a headache to deal with the tax accountant that Big Dave just avoided the whole subject of taxes.

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