Can I Use Free Tax Filing Software For Business Income?

Employment status has a direct bearing on how the CRA regards an individual under the Income Tax Act, and it has a bearing on employment insurance and the Canada Pension Plan (CPP) as well. Ownership of a business only partly defines employment status, and the facts surrounding a working relationship may affect how the CRA perceives an individual. For example, a person hired to complete some interior construction may have a renovation business. However, in this case, the payer sets strict hours, tells the worker how to complete the work and allows the worker to use tools belonging to the payer. Autonomy and use of tools are two factors that the CRA uses to define self-employment status. If in fact a person meets criteria as an employee, income from such a source is handled through a T1 tax return, even if the individual has a company doing the same work. T1 returns supporting employment income have a number of options to use free software.

If a business qualifies as self-employment income, it is reported on a T1 federal tax return for individuals using form T2125. When a business and professional activity exist together, or an individual has two or more of either activity, a T2125 form is required for each business activity. Revenues from self-employment are totalled and reported on a T1 federal return on line 162 for business activity, line 164 for professional revenue and line 166 for commission income. Manufacturing businesses report costs of goods used to make products for sale, and these plus reasonable business expenses are subtracted from gross income to create net income. The individual’s share of net income transfers to line 135 for business income, line 137 for professional activity or line 139 for commission earnings.

Business income from self-employment is supported by most T1 return tax preparation products approved by the CRA for use with its Netfile electronic filing program. The CRA’s approval process is a three-phase program and tests proposed software with an extensive array of tax scenarios. Software packages do not need to support every aspect of tax filing, and the CRA allows some omissions, though self-employment earnings are common, and many tax software products, including some free offerings, include form T2125 support. Self-employment income is omitted from some simple-tax-form free offers, so check the products you consider closely to be sure self-employment business income is supported.

Your own business practices may suggest how to handle tax returns using free software. “If you use accountants for your other business activity, consulting with them prior to completing your tax return is a good idea, even if you are using form T2125 to declare business income and expenses,” says Karen Benke, certified financial planner and senior financial consultant with Investors Group in London, Ontario. Retaining records in support of your federal return is required by the CRA. While storage format is flexible, be sure to save your tax information in a form other than the proprietary format of the free software package you use. If the company supplying the online software you use for your current return ceases business two years in the future, you need your return stored in a format you can access, such as a PDF.