The Canada Revenue Agency allows self-employed individuals to claim a host of expenses provided they are used to generate income and are reasonable, explains Ronald Watson, chartered accountant in Fort Erie, Ontario. “Income tax rates for the self-employed individual are the same as personal tax rates for employed workers.” With a small difference, Watson adds. “Someone who owns their own business has deductions that are more than the average wage earner.” The income earned from self-employment can be from a sole proprietorship or a partnership. If your business is incorporated it is not considered a self-employment situation.
2016 Tax Rates
As a business owner, you file your personal income tax return and pay the same amount of tax as any employed wage earner. Your business income, after deductions, is considered your annual wage, you report it as professional or business income. Canada has a progressive income tax, and the federal tax rate on personal income for 2013 tax year is as follows:
- The first $45,282 of taxable income is taxed at 15 percent.
- The next $45,281 is taxed at 20.5 percent (the portion of taxable income between $45,282 and $90,563).
- The next $49,825 is taxed at 26 percent (the portion of taxable income between $90,563 and $140,388).
- The next $59,612 is taxed at 29 percent (the portion of taxable income between $140,388 and $200,000).
- Income over $200,000 is taxed at 33 percent.
Provinces and territories, except for Quebec, calculate their income tax the same way. For example, in Ontario:
- The first $41,536 of taxable income is taxed at 5.05 percent.
- The next $41,539 — 9.15 percent.
- The next $66,925 – 11.16 percent.
- The next $70,000 – 12.16 percent.
- Amounts over $220,000 – 13.16 percent.
Definition Of A Business
The definition of a business under Canadian tax law is “a profession, calling, trade, manufacture, undertaking of any kind whatever or an adventure or concern in the nature of trade.” It must be entered into with a reasonable expectation of turning a profit, and there must be evidence to that extent. The profit you generate from any activity is considered business income and must be declared. A business must also have a definite start date. You can deduct expenses against the profit as of this date. CRA reviews each business on its own merits when defining the business’s start date.
“When it comes to claiming expenses against your business income,” Watson notes, “There’s a very broad brush stroke that can be used. Anything that I use to make a profit is potentially deductible.” The CRA allows a multitude of business expenses to be deducted from salaries and benefits, traveling expenses, goods for retail sale, attorney and accounting fees, rent, leases, bank charges and maintenance. If your business is located in your home, you can deduct portions of your mortgage payments, rent, utilities, repairs, upgrades and property tax. The percentage deducted depends on the amount of space you use to carry on your venture. Car expenses may be deductible if you use your car to do business, including lease payments, maintenance, parking and depreciation of the vehicle. All of these deductions help reduce your taxable income and thereby your taxable rate.
Filing As A Partnership
A partnership does not file income tax on its earnings and is not required to pay tax. The income earned from a partnership is divided between the partners, and each respective partner files her own return. The income, deductions and any other credits or losses are divided according to the partnership agreement in place. Each share of income must be reported whether it was received in cash or as a credit. Special rules apply to a partnership concerning capital gains and losses and recapturing cost allowance. If a partnership is dissolved or an interest is sold or disposed, CRA has special guidelines in place.
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References & Resources
- Canada Revenue Agency: Employee or Self-Employed?
- Ronald Watson; Chartered Accountant; Fort Erie; Ontario
- Canada Revenue Agency: Sole Proprietorships and Partnerships
- Canada Revenue Agency: Canadian Income Tax Rates for Individuals – Current and Previous Years
- Canada Revenue Agency: What is a Business?
- Taxes Canada: Tips on Specific Lines
- Canada Revenue Agency: Reporting Partnership Income
- Canada Revenue Agency: T5013 Partnership Information Return Filing Requirements