Last updated Feb. 8, 2021.
If you’re self-employed, you already know how stressful tax preparation and tax filing can be – keeping track of receipts, staying up-to-date on the Canada Revenue Agency’s tax policies, and navigating tax season.
Luckily, we have 7 tried-and-true tax tips that will help you stay on track throughout the year, maximize your deductions and lower your overall tax bill.
1. Monitor your cash flow
Take the time to monitor your cash flow on a daily or weekly basis. This will shine a light on where you’re getting the best return on your dollar.
If you break it down, you’ll realize a large portion of your business is coming from a very small portion of your clients. If you find a specific product is performing well, it could be an opportunity to streamline your portfolio or adjust your pricing.
Consistently reviewing your cash flow will also help you catch overdue payments from clients, see if your own bills are overdue and determine if a slow month is cause for concern or just a cyclical part of your business.
2. Consider incorporating your business
There are many benefits to incorporation. Because an incorporated business is a separate entity, you are not personally responsible for debts, obligations or other acts of the corporation (talk to your tax professional about exceptions). Corporations are also taxed at a lower rate. For Canadian-controlled private corporations claiming the Small Business Deduction, the net tax rate is 9%.
If the business is not incorporated, your income is taxed at the personal income tax level. In 2020, personal income is taxed 15% on the first $48,535, over $48,535 to 97,069 is 20.50%, over $97,069 to $150,473 is 26%, over $150,473 to $214,368 is 29.22% and over $214,368 is 33%.
If you’re earning more than you need to live, you can reinvest surplus profit into the business, allowing you to defer personal taxes on withdrawals.
In addition, the business has extended life, there are opportunities for income splitting, along with more opportunities to raise capital.
You can also use the lifetime capital gains exemption if you have capital gains arising from the disposition of certain properties (small business corporation shares and qualified farm and fishing properties) and meet certain conditions – the exemption could spare you from paying taxes on some or all of it.
3. Organize business expenses throughout the year
Sit down for 30 minutes every month to review and categorize your receipts. This keeps things manageable as the year progresses and keeps you on top of your spending, so you don’t miss out on any tax deductions.
We advise our small business Members to purchase an accordion folder every year to house all business receipts. These inexpensive folders are easy to obtain and allow you to organize your receipts by category and year, so finding a specific receipt is a snap in the future.
4. Take advantage of tax deductions
There are many business expenses you can claim as a tax deduction, helping reduce the amount of taxes you must pay and keeping more money in your pocket.
Below is a partial list of some of the expenses your small business can deduct:
- Home office expenses
- Advertising and promotional material
- Mortgage interest
- Repair and maintenance
- Interest on loans
- Property taxes
- Capital Cost Allowance (CCA)
- Meals and entertainment (up to 50%)
- Salaries, wages, benefits, and medical expenses
- Vehicle expenses and fuel costs
- Accounting and legal fees
- Gifts to employees for holidays or special occasions
The list of eligible tax deductions is extensive, but there are also a number of expenses you can’t deduct to lower your businesses tax obligation.
- Local travel (getting to and from work)
- Holidays and personal vacations
- Interest or penalties paid on your income tax
- Too much in gifts (the limit is up to $500 per year)
5. Keep all Records & Receipts for at Least 6 Years
To keep the CRA happy, you need to keep records and copies of all your invoices.
Even though you don’t need to send your receipts to the CRA when you file your taxes, if they ask for proof of a deduction and you can’t provide it, they will reject the claim.
That’s why it’s important to have a separate bank account for your business and use a separate credit card.
In addition to keeping track of all your receipts, you need to keep that paperwork for at least six years. Why? That’s how far back the CRA can go if it decides to audit you.
6. Keep Emergency Funds
Being self-employed means getting used to inconsistent or unreliable cash flow.
Because income can vary from month-to-month, it’s a good idea to set aside enough money to carry you through the dry periods. This can help pay for expenses and taxes, which are not automatically deducted.
Set up an emergency fund so you can cover your personal expenses when you’re not bringing home income.
7. Always file a tax return
- Provincial tax benefits
- Tax refunds for instalment or source deductions
- Refundable medical expense supplement
- Canada Pension Plan or Employment Insurance (EI) premium overpayments
FBC – Helping Self-Employed Canadians Manage Their Taxes
If you’re self-employed or an independent contractor, the tax professionals at FBC can help you maximize your tax deductions and save money.
FBC has worked exclusively with small business owners, farm operators, independent contractors, and entrepreneurs since 1952.
For more than 65 years, FBC has provided clients from across the country tax services with personalized tax service uniquely tailored to their individual needs.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.