Working for yourself might seem like the ideal situation to a number of people, but when it comes to your calculating your taxes, figuring out if and how to claim certain business-related expenses when reporting your income might leave you scratching your head.
If you have more than one source of self-employed income, separating your different kinds of self-employment income and expenses by type is a great place to start.
According to the Canada Revenue Agency (CRA), you may have self-employment income from:
- a business
- profession
- commissions
- farming or fishing
Self-Employment Income: Beyond Business Income
As per CRA, business income includes income from any activity you carry out for profit or with a reasonable expectation of profit. This includes a profession, calling, trade, manufacturing endeavor, an undertaking of any kind, as well as a venture or concern in the nature of trade.
The key here is that there has to be an expectation of profit. In other words, not making a profit when you first start is not an issue, but you must strive to make a profit. It is not acceptable to go on for years losing money just to get a tax exemption.
Sole Proprietorships, Partnerships, and Corporations
There are three basic forms of business. There are also hybrids of these forms.
Sole proprietorships and partnerships are not separate from the owners; the income is attributed to the individuals. Self-employed income only arises out of sole proprietorships and partnerships. You report the income in your Income Tax and Benefit Return.
On the other hand, Corporations are separate legal entities that have a life separate from the individual shareholders and file their own taxes apart from the corporation’s individual owners. Income from a corporation should be reported in a separate return called T2 Corporation Income Tax Return.
Unique Types of Business Operations
The CRA has information for sole proprietorships or partnerships involved in unique types of business operations.
- If you are a farmer or fisherman, or if you run an at-home daycare, you should note the CRA’s special instructions for business claims that involve these activities.
- If your income is from a property, look for special instructions relating to rental income too.
Filling in the Tax Form
Report your self-employment income on separate lines for each source by entering your gross income and net income in lines 13500 to 14300 of your income tax and benefit return. These amounts are calculated by using the T2125 Statement of Business Activities form which is a part of your personal income tax return. Your gross income is what you have earned before any expenses are deducted. Your net income is what is left over after deducting expenses.
- Expenses that qualify as deductions are those that you incurred to earn the revenue from self-employment income.
- You must be able to justify that the expense was necessary to earn your self-employment revenue.
- Expenses that do not contribute to earning the related self-employed income cannot be deducted.
If you have more than one business activity, you have to complete a separate T2125 for each activity. Check our TurboTax guide on how to fill the T2125 form.
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