“Self-employment leads to so many advantages, so many expenses you can claim against your earnings, as long as those expenses contributed to your business,” says investment advisor Mallory Saugeen, from St. Thomas, Ontario. “The Statement of Business or Professional Activities, form T2125, walks you through all categories of self-employed expenses.” If your business isn’t incorporated, you report your self-employed earnings through your individual tax return, so all your tax deductions are captured in one return.
Claiming Business-Use-of-Home Office Expenses
“The CRA requires only that you use a “reasonable” way to calculate how much of your house is used as an office,” says Saugeen.
“For instance, if you’ve converted one bedroom in a five-bedroom apartment to a full-time office, you can claim 20 percent of your rent, utilities and home insurance. If, in the same apartment, you share part of the living space as office space for 8 hours a day, you can only claim 8 percent.”
When you own your home, you can use that same formula to deduct interest on your mortgage, property taxes and wear-and-tear on your house, called the capital cost allowance. Most experts strongly advise against claiming the CCA against the business portion of your home, since, when you sell your home, you will lose some tax protection offered under the principal residence exemption.
Deductible Expenses for Business Use of a Vehicle
You can claim the business use of your personal vehicle for credit against self-employed earnings. The best way to show the CRA you’re on top of it is to keep a log book documenting your kilometers driven for personal and business purposes. When you determine the percentage of distance you drove your car for business use, you can claim that percentage of the car’s expenses for the year.
Auto expenses that reduce your taxes include:
- fuel, such as gasoline, diesel or propane, and oil
- repairs and routine maintenance
- auto insurance
- vehicle license and registration fees
- the capital cost allowance
- interest paid on a car loan, up to allowed limits
- leasing costs, up to allowed limits
The CRA considers driving to and from work to be personal use.
Capital Cost Allowance
Major purchases of equipment, a vehicle or a building mean something different when it comes to your taxes, as opposed to, say, a case of copier paper. Big-ticket items have a lifespan, while the paper is consumed as needed. These are capital and current expenses, respectively.
Capital expenses have the purchase value spread over the life of the item.
The Income Tax Act sets out many capital cost allowance classes showing how to allocate the cost of a capital item each year, until its useful life is over. Each class has a percentage by which items lose value each year. This value becomes an expense credited against your self-employed earnings, reducing the amount on which you pay taxes.
Other Business Operating Expenses
“The general rule is that if you spend money to earn self-employed income, then it’s a legitimate expense and it should be included on form T2125,” says Saugeen. “There are some expenses that you can only claim a portion, things such as meals, entertainment and advertising in certain Canadian magazines.”
Other types of allowed operating expenses include:
- accounting and legal fees
- business taxes, licences, association fees or dues
- insurance premiums, bank fees and loan interest up to allowed limits
- repairs and maintenance to buildings and equipment
- office expenses, such as supplies and telephone service
Using tax preparation software designed to support self-employment and small business, such as TurboTax Self Employed Online, will assist you when completing form T2125.
References & Resources
- Mallory Saugeen; Certified Financial Planner; St. Thomas, Ontario
- Canada Revenue Agency: Motor Vehicle Records
- Canada Revenue Agency: Allowable Motor Vehicle Expenses
- Canada Revenue Agency: How to Calculate the Deduction for Capital Cost Allowance (CCA)
- Canada Revenue Agency: Types of Operating Expenses
- Home Office Expense Claims Coming Under Closer Scrutiny
- Siri Stafford/Digital Vision/Getty Images