While the self-employed have until June 15 to file their tax returns, any tax balance was due on May 1.Getty Images/iStockphoto
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When some self-employed professionals and gig workers start up their business, tax comprehension is often a stumbling block, advisors say.
“They don’t have a sense of what they are going to owe and how taxes work,” says Liz Schieck, certified financial planner (CFP) at New School of Finance in Toronto, which conducts educational seminars about the distinction of being self-employed. That includes specifics on taxes and expenses.
Here are five mistakes self-employed people tend to make leading up to the tax-filing deadline of June 15:
1. Not filing or paying taxes on time
Some self-employed professionals neglect to file their taxes because they believe they didn’t earn enough to owe any taxes, says Vanessa Sarveswaran, vice president, tax, retirement and estate planning at CI Global Asset Management in Montreal.
“Until you actually prepare your tax return and check your available expenses, you don’t really know if you don’t owe,” she says.
While the self-employed have until June 15 to file their tax returns, any tax balance was due on April 30 (May 1 this year due to April 30 falling on a weekend). Failing to pay up on time means the taxpayer is now paying compounding daily interest. And if they miss the June 15 filing deadline, the late penalties get even steeper. The Canada Revenue Agency (CRA) charges 5 per cent of any balance, plus an additional 1 per cent for each month the tax return is late.
Gig workers who earn more than $30,000 a year must also collect and remit GST/HST and file returns quarterly or annually. Ms. Sarveswaran says the penalties for being late or not filing GST/HST vary depending on the province.
The takeaway? Sole proprietors and gig workers need to get in the habit of setting money aside for taxes, Ms. Sarveswaran says.
“A lot of businesses use their excess cash to reinvest in their businesses without realizing they will have to pay their income tax liability by April of the following year,” she notes.
The CRA will notify a sole proprietor who consistently owes more than $3,000 a year on their income taxes about making mandatory quarterly tax instalments. That can help with staying organized, Ms. Sarveswaran says.
2. Copying tax strategies from friends
Receiving and following tax advice from friends who are fellow sole proprietors or gig workers is a dangerous proposition that may trigger an audit from the CRA.
Ms. Schieck sees the issue as twofold: simply bad tax advice and/or the advice doesn’t apply to all types of businesses.
She cites the example of an electrician who can write off safety footwear and uniformed coveralls, a legitimate business expense. But when other sole proprietors learn about the expense, they believe they can deduct say, a new business suit for a client meeting.
“It’s not a unique circumstance for your business that you have to look presentable,” she says. “They need to understand [these are] completely different circumstances for a completely different business.”
3. Not deducting expenses properly
Wendy Brookhouse, founder and CFP at Black Star Wealth in Halifax, sees some sole proprietors expensing big-ticket items such as a vehicle, website or computer instead of declaring it as a capital cost.
“It should not be all expensed in year one. When something is a capital cost, only a percentage is allowed to be expensed in a given year,” she says. “The CRA has a list of types of property and the schedule to be used for depreciation.”
The rule of thumb for a capital cost is whether the purchase is going to serve the business for several years. For example, in the case of a vehicle purchased in 2022, the maximum allowable capital cost is $34,000, and 30 per cent of that can be included in the expenses for the year, Ms. Brookhouse says.
She also sees entertainment expenses being declared incorrectly – a business can only claim 50 per cent of the cost, not the full amount.
Furthermore, only a portion of utilities can be claimed, the part that’s used specifically for the office, she adds. She also says a home office must be a dedicated space for that purpose, not a repurposed guest room, for example.
“Then it becomes a grey area of how much is dedicated to the office versus something else,” Ms. Brookhouse says.
Ms. Schieck cautions small business owners to be consistent with their claims or be prepared to explain sudden changes to their expenses and allocations.
She cites the example of having an office that makes up 15 per cent of a taxpayer’s house and the following year, the office has increased to 30 per cent due to a move or housing expanded inventory for the business.
4. Not keeping a record of invoices, expenses and receipts
Some sole proprietors lack an astute system for their paperwork and, as a result, either lose information or fail to record it properly.
Sometimes, they line-item the expense and deduction on the tax return but don’t have the proof. A recent survey from H&R Block Canada Inc. showed that 44 per cent are willing to risk not declaring any income.
In the case of an audit, this is a costly mistake, Ms. Sarveswaran says. “They will most likely deny your expense when audited.”
5. Not receiving accredited tax advice
Sometimes, it’s worth it to fork out the dollars for a professional. Ms. Sarveswaran notes that a chartered professional accountant can save clients money in the long run as they’re more aware of the tax nuances of the specific business.
“They know about the credits and deductions that you may not be aware of that could save them on taxes for their businesses,” she says. “It’s their job to know.”
A tax professional can also examine the business for opportunities such as the best time to incorporate.
“Perhaps you’re generating so much income that it would be a good idea,” she says. “An accountant can explain all the benefits of doing so.”
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Deanne Gage