The Covid pandemic forever changed the way Canadians viewed their relationship to their employer and working from home rather than a traditional office. Many ventured into the world of being self employed either as a full-time independent contractor or on a part time basis, and the term Gig Economy was born.
Gig economy is a free-market system where companies and independent workers engage in short-term work arrangements and encompasses all sorts of fluid work arrangements. The workers can be independent contractors and professionals, consultants or temporary contract workers. For decades we referred to this breed of entrepreneurs as Freelancers but most who operate as gig workers do so parttime. This could be in the form of contracting as a driver for ride sharing platforms like Uber to being a caregiver/nanny to offering tutorial services for those in need of your skills. The opportunities for creative, highly motivated entrepreneurs are endless, and gig workers are a part core of the fabric in almost all industries.
Is your side work taxable?
Yes, all income is reportable and most non incorporated individuals due so by using Form T2125 Statement of Business or Professional Activities when filing their annual income tax return.
If your net income from your side business is greater than $3,500 than CPP/QPP contributions must be made, and expect to pay both the employee and employer’s contribution.
Even if the business generates a loss, it still has to be reported with the good news being that possibly some or all of the loss can be deducted from other regular earned income.
Be aware that CRA expects quarterly tax remittance on the net amount declared and investigate beforehand whether you need a GST/HST number.
What expenses can I deduct?
Being self employed allows a number of business expenses as long as the goal was to earn active business income. CRA draws a line for tax driven business opportunities such as multi level marketing that do not generate a realistic expectation of a profit.
Some of these expenses include:
- Traditional office related supplies like those bought at Staples
- Cellphone and internet expenses prorated for business use
- Advertising including hosting a website, business cards, social media and ads in local newspapers or TV/radio
- Shipping and postage expenses
- Accounting and legal fees
- Salaries for employees or paid to other contract workers
- Business or E&O insurance premiums if needed
- Licensing fees or dues to belong to a specific organization that is related to your business
- Promotional & entertainment expenses keeping in mind a 50% deductible which is considered your own personal usage/enjoyment. This includes taking a client for lunch to discuss business related opportunities
- Software subscriptions like Adobe or McAfee or others related to earning active income
Can I deduct home expenses if my office is in my home?
Yes, absolutely expenses like rent, mortgage interest, property taxes, home insurance and some maintenance items are allowable. Typically, it is based on the square footage your office represents within the total footage of your home. Most accountants suggest a figure between 10% – 15% of gross home related expenses unless it can be shown that a larger percentage can be justified. This would include the home being used for product storage or additional space is needed for client meetings or extra staff.
How about deductions for a new computer or office furniture?
These are considered depreciable property and are not allowable for a full tax deduction in the year they were purchased. They are however deductible over a number of years using a Capital Cost Allowance (CCA) schedule. Depending on what the asset is CRA has a formula in place to determine what can be used in the year of purchased. The balance is carried forward until the asset depreciation is fully used up or the asset is sold/donated.
What about my vehicle expenses?
Much like your home expenses if it can be shown a vehicle is needed in your line of work to generate activate income, the expenses are allowable. These can include – car lease or interest on a loan, insurance, gas, oil & maintenance, and CCA depreciation.
It is vital to use a Daily Travel Log to document the miles used for your own personal and business needs. CRA will not allow a full deduction on all personal vehicle expenses because they know no one drives 100% of the time strictly for business, there will always be considered a certain amount used for personal needs.
How do I track all these expenses?
Its manageable if you set up a system right at the very beginning of your venture into being self employed. Create an Excel spreadsheet or use software packages like QuickBooks and enter your expenses at the end of every month.
If using an accountant or another tax preparer the organization you put into a creating a readable summary that you bring to them every spring is appreciated. It also saves you money by not paying their staff to look through your shoe box of receipts to determine what is eligible at tax time.