Working for yourself may appear to be the ideal arrangement for some, but when it comes to calculating your taxes, determining whether and how to claim certain business-related expenses while reporting your income may leave you puzzled.
If you have more than one source of self-employment income, categorizing your self-employment income and expenses is a good place to start.
According to the Canada Revenue Agency (CRA), you may have self-employment income from:
- a business
- farming or fishing
Self-Employment Income: Beyond Business Income
According to the CRA, business income comprises income from any activity you engage in for profit or with a reasonable expectation of profit. This comprises a profession, calling, trade, manufacturing activity, any form of undertaking, as well as a venture or concern in the nature of trade.
The crucial point here is that there must be a profit expectation. In other words, losing money when you first start is not a problem, but you must strive to make profit. It is not acceptable to continue losing money for years in order to gain a tax exemption.
Sole Proprietorships, Partnerships, and Corporations
There are three basic forms of business. There are also hybrids of these forms.
The income of sole proprietorships and partnerships is not separate from the owners; it is attributed to the individuals. Only sole proprietorships and partnerships generate self-employment income. The income is reported on your Income Tax and Benefit Return.
Corporations, on the other hand, are separate legal entities with a different life from the individual shareholders and submit their own taxes separate from the corporation’s individual owners. Corporation income should be reported on a separate form called the 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
Fill out lines 13500 to 14300 of your income tax and benefit return with your gross and net income for each source of self-employment income. These figures are derived from the T2125 Statement of Business Activities form, which is included with your personal income tax return. Your gross income is what you made before deducting any expenses. After deducting expenses, your net income is what remains.\
- 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.
If you feel overwhelmed with the tax stuff, reach out to IDM and have one of our tax experts help you from start to finish.