presents Everything You Need To Know About Expenses An income tax guide for self-employed people by Sunny Widerman
Table of Contents Introduction 3 Is this booklet for you? 3 What this booklet covers 3 What this booklet does not cover 3 About the workbook 3 Disclaimer 3 Feedback 3 Reporting expenses on your tax return 4 First step: organize your receipts 4 The Gist of GST 5 Do you need to include GST in your expenses? 5 To exclude the GST from expenses and calculate the GST paid 5 Using the workbook 7 Adding another row to the spreadsheet 7 What expense goes where 8 Look out for the 'exceptions and exclusions' symbol 8 Capital Expenses 8 Business-use-of-home expenses 8 Last check before you begin 9 Government Expense Categories 10 Conclusion 14 If you still don't know where an expense goes 14 A final note 14 Who to contact for help 14 About Sunny Widerman 15 and Personal Tax Advisors 15
Introduction Is this booklet for you? This booklet is for anyone who earns self-employment income and pays taxes in Canada, and is designed to help them fill out the Expenses portion of the form T2125 Statement of Business or Professional Activities in their tax returns. The booklet is particularly aimed at people involved in the arts, because their needs and special expenses aren't usually covered in the standard materials produced by the Canada Revenue Agency (CRA). It is not for incorporated individuals. What this booklet covers By the time you have used this booklet and completed the Expenses Workbook, you will have totals to put into each of the expense categories given on the T2125, except for Motor Vehicle Expenses, capital cost allowance (CCA) and Business-Use-of-Home. What this booklet does not cover This booklet does not cover CCA (Capital Cost Allowance), Motor Vehicle Leasing Costs, or the GST return. Motor Vehicle Expenses and Business-Use-of-Home are reasonably self-explanatory on the form, and Capital Cost Allowance would be a whole other book. It also does not cover Part 4 of the T2125 form, Cost of Goods Sold. This section refers to inventory, and is for individuals whose main business is selling a product. About the workbook You should have received a workbook along with this booklet, either in electronic or in print form. The electronic version is an Excel spreadsheet that calculates totals for each category. Be sure when using the workbook that you include or exclude the GST as necessary (see The Gist of GST, later in this booklet). If you do not have the workbook, you can request one by sending an email to. Disclaimer Personal Tax Advisors has made every effort to ensure that the information contained in this booklet is accurate according to Canadian tax laws as of January 2009. We cannot be held liable for inaccuracies in tax returns filed using this information, or for changes in tax law that may occur in the future. This book is a guideline only, and does not replace the advice of a qualified tax preparer or advisor. When in doubt, consult your Tax Advisor. Feedback This guide is designed to be easy to use, easy to understand, and reasonably fun to read. We appreciate any feedback on how to make it better. Please send your comments, questions and suggestions to feedback@personaltaxadvisors.ca.
Reporting expenses on your tax return This portion of the booklet outlines the various expense categories included in Part 5 of the government form T2125 Statement of Business or Professional Activities, which self-employed people must complete. CRA materials are generalized for people with more common businesses like doctors and limousine drivers, and often don't include types of expenses unique to professionals who work in the arts. Part of the purpose of this booklet is to provide guidance as to how those unique expenses can be included in the Statement of Business or Professional Activities. T2125 Statement of Professional Activities This booklet covers the highlighted part of this form. First step: organize your receipts The first step in preparing your expenses it organize your receipts into your own personal categories. Later we'll translate and group these personal categories into government categories so they can be easily listed in your tax return. Every business has its own set: a singer might have CDs and a performance wardrobe, while a painter might have paints and smocks. None of these categories show up on the T2125, of course. Figuring out how to turn personal categories into government categories is what this booklet is all about.
The Gist of GST Before you start adding up your personal categories and filling out your workbook, you may need to take out the GST from your expenses. Do you need to include GST in your expenses? If you are not registered to collect the GST include the GST in all your expenses If you are registered to collect the GST and are on the quick method include the GST in all your expenses not on the quick method exclude the GST from your expenses using one of the charts below. If you're not sure whether or not you're on the quick method If you have a GST number and don't know what the quick method is, assume you're not on it. When you registered for your GST number you were put on the long method by default; to be on the quick method you have to ask for it. If you're still not sure, call the Canada Revenue Agency's GST and self-employed department at 1-800-959-5525 and ask. To exclude the GST from expenses and calculate the GST paid The charts on the following page show the formulas you use to calculate the cost of an item before GST, which you will need to fill out your Expense Workbook. They also show you how to calculate how much GST you paid for that item, which you will need to complete your GST return (not covered in this booklet).
Table 1: GST rate of 5% For expenses incurred on or after January 1, 2008 Type of expense To calculate the cost excluding GST GST paid Item on which GST and Ontario PST are charged (e.g., office supplies) [total price you paid] x 0.956 [total price you paid] x 0.044 Item on which GST is charged, but no PST (e.g., reference books) [total price you paid] x 0.952 [total price you paid] x 0.048 Table 2: GST rate of 6% For expenses incurred on or after July 1, 2006 but before January 1, 2008 Type of expense To calculate the cost excluding GST GST paid Item on which GST and Ontario PST are charged (e.g., office supplies) [total price you paid] x 0.947 [total price you paid] x 0.052 Item on which GST is charged, but no PST (e.g., reference books) [total price you paid] x 0.943 [total price you paid] x 0.057 Table 1: GST rate of 7% For expenses incurred before July 1, 2006 Type of expense To calculate the cost excluding GST GST paid Item on which GST and Ontario PST are charged (e.g., office supplies) ([total price you paid] x 0.939 [total price you paid] x 0.061 Item on which GST is charged, but no PST (e.g., reference books) [total price you paid] x 0.934 [total price you paid] x 0.065
Using the workbook The workbook provides space to enter your expenses in each of the categories listed in the CRA's form. All you need to do is enter the type of expense and the amount, and the workbook will add up your totals automatically. Enter each amount in dollars and cents, without the dollar sign. Do not use dollar signs ($), letters, commas, or any punctuation (other than the decimal point) in the 'amount' column, or the workbook won't add the numbers up properly. The workbook will add dollar signs and thousands separators (commas) as necessary. Example: Advertising Can include: ads, business cards, flyers, website maintenance, etc. type amount Business cards$60.00 Promotional pens$350.00 Yellow Pages ad$1,500.00 Total for this category: $ 410.00 Adding another row to the spreadsheet If you need more space in a category, you can another row to the spreadsheet. 1. Right click (Mac users: hold down the " " key and click) on one of the rows where you have entered expenses. 2. Select 'Insert' from the menu. 3. A new, empty row will appear above the one you selected. When you type a dollar value into the 'amount' column of the new row, it will be added to the total for the category.
What expense goes where Now we're getting to the meat of the matter. Each Expense category on the government's T2125 Statement of Business or Professional Activities form is summarized in the next section, with tips on what you can include there. Look out for the 'exceptions and exclusions' symbol Be sure to pay attention to this symbol:. That symbol warns you that there are some important exclusions coming up things you might think you can include in a category, but which don't belong there. Capital Expenses Speaking of exclusions, this one applies to every category. Do not include capital expenses in any of the categories outlined below. They're handled differently, with calculations you do on page 3 of the T2125 Statement of Business or Professional Activities. What is a Capital Expense? A capital expense is money you spend on an item that provides lasting value, beyond the current tax year. Non-capital items only have value for the current year. To figure out if something is a capital expense, ask yourself: is it something that I use up, or that expires regularly, or that has to be bought or renewed every year? If the answer to any of those questions is 'yes', then it's not a capital expense. Examples: Item Computer Postage stamp Hammer Professional membership Is it a Capital Expense? Yes you keep using it year after year. No once it's used, it's gone. Every year you have to buy more. Yes you keep using it year after year. No you have to renew it every year. Capital expenditures have special rules. To learn how to handle them, read the government guide to the T2125 Statement of Business or Professional Activities, or consult your Tax Advisor. Business-use-of-home expenses Business-use-of-home expenses are expenses paid for a portion of your home, if you use it as a workspace. Some of those types of expenses rent and property taxes, for example seem to have their own category on the first page of T2125 Statement of Business or Professional Activities. However, those are reserved for workspaces outside the home. Business-use-of-home expenses, just like motor vehicle expenses and capital expenses, are handled on their own. This booklet doesn't explain these expenses, because the T2125 Statement of Business or Professional Activities and its guide are quite detailed and selfexplanatory.
Last check before you begin Make sure you've completed the following steps before you move on: 1. Organize your receipts into your categories, separating out capital expenses 2. Add up each of your categories, making sure to include or exclude the GST as outlined in the section The Gist of the GST 3. Take a deep breath Okay, you're ready! Let's get started.
Government Expense Categories Advertising line 8521 There are many forms of advertising. Some common ones are: Business cards Brochures, posters, flyers Website hosting and domain names Listings in directories such as the Yellow Pages or Casting Workbook Bad debts line 8590 This is where you include amounts that you billed people and included as income, but ultimately never got paid for. Most people use the 'accrual method' for calculating their income and expenses. That means that for tax purposes you record income when you bill someone, and expenses when you are billed even if you weren't paid on time, or if you waited to pay the other person. What can happen is that you bill someone, include the amount of that bill in your tax return and pay taxes on it, but later realize that they're never going to pay you. Since you never got the income, you really shouldn't have to pay the income tax. Bad Debts is where you get that tax back. By including here the money you billed for but were never paid, you subtract the income from this year's return, thereby getting the tax back. Business tax, fees, licenses, dues, memberships and subscriptions line 8760 Include fees for all your professional memberships, registration of business name, etc. If you are an actor, your ACTRA fees go here. Do not include payments to medical plans here, even if they're required for your membership (e.g., ACTRA Fraternal medical benefits); they are a medical expense. Consult your Tax Advisor to learn more about where those go. Delivery, freight and express line 9275 This category is for people who ship out a product. Enter the amounts you paid to send out your product here. This category is not for the usual postage or courier charges on letters or small packages you sent out those are Office Expenses (see below). Fuel costs (except for motor vehicles) line 9224 Like Delivery, freight and express (above), this category is for people who ship out a product. Do not include the gas you put in a vehicle in order to get yourself from place to place. That is a Motor Vehicle Expense (line 9281, below).
Insurance line 8690 Insurance you pay on things you own for your business (your computer or special wardrobe, for example), or for products you ship out. This category is not for house, apartment or contents insurance, even if you work at home. Such so-called business-use-of-home expenses go in the Business-Use-of-Home category, which is calculated on page 2 of the government's form T2125 Statement of Business or Professional Activities. Interest line 8710 This category includes interest on loans, lines of credit, and credit cards. Don't forget the credit cards! If you're not sure how much was interest on business expenses and how much was personal, you can go through your bills month by month or just figure out a percentage that seems reasonable. You can also consult your Tax Advisor for help with figuring out a percentage. Maintenance and repairs line 8960 This category if for maintenance and repairs for equipment or other items related to your business. Do not include maintenance and repairs on your home in this category, even if you work there. Such so-called business-use-of-home expenses are calculated on page 2 of the government's T2125 Statement of Business or Professional Activities form. Management and administration fees line 8871 This category includes agent's commissions and managers' fees. It also includes bank fees, but only if you have a separate account for your business. If you manage your business money out of your personal bank account, you shouldn't write off those bank fees as an expense. Meals and entertainment (allowable part only) line 8523 This category is for meals and/or events you attended as part of a business or client meeting. As of January 2007, you can write off only 50% of your business meals and entertainment (that's what they mean by 'allowable part'). If you have to travel for your business, even if it's overnight, the meals you have while away from home also go here, and are also only 50% deductible. Remember, this category is only for meals and entertainment that were part of client or business meetings. If you're a performer or a film or theatre critic and must therefore attend theatre or films as part of your research, don't include those expenses here. Put them with your research expenses under 'Other expenses' (line 9270, below) so that you write them off entirely. Similarly, if you have some people working for you and you treat them to a meal as a thank you or as a benefit of working for you, the cost of that meal doesn't go in this category. Put it in 'Salaries, wages and benefits' (line 9060, below) instead so you can write the whole thing off. Motor vehicle expenses (not including CCA) line 9281 This booklet and workbook doesn't cover Motor vehicle expenses, as the government's own form is quite detailed and self-explanatory. See page 4 of T2125 Statement of Business or Professional Activities. Office expenses line 8810 Use this category for office supplies, postage, courier, etc.
This category does not include calculators, computers or peripherals, furniture, which are capital expenses (see Capital Expenses in the previous chapter). Supplies line 8811 This category is for items you buy and use in the manufacture of the product that you sell. A photographer could include frames and film in this category; a luthier could include wood and strings. This category does not include office supplies (see 'Office expenses', above), because they're not physically incorporated into a product. Legal, accounting and professional fees line 8860 This category is for lawyers', bookkeepers', accountants' and tax preparers' fees. Property taxes line 9180 Use this category only if you have a workspace that's not part of your home. This category does not include taxes paid on your home, even if you work there. Such socalled business-use-of-home expenses go in the Business-Use-of-Home category, which is calculated on page 2 of the government's form T2125 Statement of Business or Professional Activities. Rent line 8910 In this case, 'rent' is only for workspaces or storage that is not part of your home. If you work from home, you can write off a portion of your home rent; but not here. This category does not include rent paid on your home, even if you work there. Such so-called business-use-of-home expenses go in the Business-Use-of-Home category, which is calculated on page 2 of the government's form T2125 Statement of Business or Professional Activities. Salaries, wages and benefits (including employer's contributions) line 9060 Use this category for amounts paid to someone else who helped you earn income, who isn't covered under 'professional fees' above. Note that you can pay a spouse or a child if they do necessary work for your business. If you paid your employees or helpers with gifts and/or meals instead of (or in addition to) money, include the cost of those here. Remember, it's to your tax advantage to include meals here rather than in Meals and Entertainment, because in this category you get to write them off in their entirety. If you ate the meal yourself, it must go in Meals and Entertainment. If your employee ate it, it can go here. Travel line 9200 This category is for costs incurred while on business and/or professional development trips. Includes plane/bus/train fare, accommodations, rental car & expenses, public transit while there. It is supposed to be for out-of-town travel. But if you travel by public transit and taxis, you can include those costs here since there's no better place to put them. This category does not include meals you eat while travelling, even if you're gone overnight. Those expenses must go in Meals and Entertainment, above.
Telephone and utilities line 9220 If you have a workspace that is not part of your home, you can include heat, electricity, local phone and water for that workspace here. You can also include the business portion of your cell phone, internet access, long distance phone, pager, and fax line here. If your residential phone line is also your business line, include the business portion of the expense, prorated by the amount of time you spend on business calls. For example, half the time you spend on your residential phone line is for business purposes, you can deduct half the phone bill. Other expenses line 9270 This is the dumping ground for every business expense that (a) doesn't fit anywhere else or (b) you're not sure about. Some examples are: performance wardrobe, professional development courses and seminars, conferences (maximum of two per year), and CDs, DVDs, theatre tickets and books if they're legitimate research materials, and promotional gifts. Buying a bottle of wine for your agent is an example of a promotional gift. Private Medical Insurance: This is also where you deduct the cost of private health services plan (PHSP) premiums. If you pay into a health plan for yourself, your spouse or common-law partner, or any member of your household, AND if you earn at least 50% of your income through your freelance business, you can deduct those premiums here (within proscribed limits). While these expenses can also qualify as medical expenses, which can be claimed on a separate form, it is usually preferable to deduct them here. This is because PHSP premiums provide a greater tax deduction as business expenses than as medical expenses.
Conclusion We hope this guide has been a help to you. We've done our best to make the government's rules reasonably clear, and to cover the most common types of expenses our clients encounter. If you have any more questions, contact us to arrange your own tax advisor to work with you, or refer to the government's own site and materials. If you still don't know where an expense goes Sometimes categorizing your expenses is an art rather than a science, and there's room for a lot of personal interpretation. For example, you might pay a web developer a fee to build and maintain your promotional website. Is that payment an advertising expense (line 8521), a professional fee (line 8861), or a salary (line 9060)? The answer: it's your call. Many expenses have one definite place on the form, while others can be interpreted various ways. Some won't fit anywhere, and just have to go into Other expenses (line 9270). A final note When calculating and categorizing your expenses for your taxes, try to be as logical as you can. But don't get tied up in knots if you're not sure exactly where a particular expense goes. With the exception of Motor vehicle expenses, meals and entertainment, and Business-use-of- Home expenses, the precise placement of an expense doesn t make any difference to your bottom line; so long as no one number is particularly irregular or high, it's unlikely to attract negative attention from the Canada Revenue Agency. If you do get audited, your task is to convince the auditor that your expenses are 'reasonable'. So long as you've been honest and feel you can confidently argue the reasonableness of your expenses, go ahead and file your return without fear. Who to contact for help Personal Tax Advisors phone: 416-361-3446 Canada Revenue Agency Visit the Canada Revenue Agency at http://www.cra-arc.gc.ca/menu-e.html For individual, non-business enquiries: 1-800-959-8281 Hours: Monday to Friday 8:15 am - 10:00 pm; 9:00 a.m. to 1:00 p.m. on weekends. For self-employed, GST and business information: 1-800-959-5525 Hours: Monday to Friday 8:15 am - 10:00 pm; 9:00 a.m. to 1:00 p.m. on weekends.
About Sunny Widerman and Personal Tax Advisors Personal Tax Advisors offers tax preparation, advice, and planning strategies for individual taxpayers, with a particular focus on the needs of self-employed or freelance clients. Sunny Widerman has been preparing tax returns for clients since 2002, and offers knowledgeable information and service in plain language and without judgement. Call (416) 361-3446 or email sunny@personaltaxadvisors.ca to discuss your tax situation or set up an appointment.