Home Office Expenses

You qualify for “In-home” office deductions for your self-employed business if you meet the following requirements:

(1) the home office is your principal place of business; or

(2) the home office is used exclusively and on a regular and continuous basis for meeting clients, customers, or patients.

Depending on the size of the office as a percentage of the total home, a proportionate share of all expenses related to the office, including rent, repairs and maintenance, insurance, property taxes, mortgage interest, heat and light, are eligible for deduction if you qualify. You cannot deduct any mortgage principal payments. Claiming depreciation could affect the status of your home for the principal residence exemption.

For employees and commissioned sales persons, “work-space in the home expenses” are allowed up to the amount of income from the business for which the office is used. A Form T-2200 - Declaration of Employment Conditions is required to be completed and signed by your employer. Employees may claim only proportionate rent, heat, light, water, and maintenance costs. Commissioned salespersons may claim insurance and property taxes as well. Expenses greater than the income may be carried forward and deducted against related income of the following year.

Should you have any questions on your ability to claim home office expenses, contact a Chartered Accountant.

The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.

Work in Progress for Professionals

Professionals who perform services as accountants, dentists, lawyers, medical doctors, veterinarians, or chiropractors have the ability to defer a portion of their professional income for income tax purposes. Where, in the normal course of operations, the professional tracks hours expended on a project and they have not yet been billed, this unbilled time or “work in progress” (WIP) would be included in the professional's income for accounting purposes. However, the Income Tax Act provides that where the professional elects in their return of income, the WIP can be excluded from the determination of income for income tax purposes.

The election is made either by attaching a letter to the taxpayer's return stating that the election has been made, or by clearly indicating this information in the financial statements. Once made, the election is valid for all subsequent taxation years and can only be revoked with the consent of the Canada Customs and Revenue Agency.

If you are a professional and believe that you could qualify for this election, contact a Chartered Accountant to help you determine if it is available to you.

The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.

Record Keeping for the Self-Employed

The Income Tax Act requires a taxpayer to keep books of account so that the Minister may verify the validity of the expenses claimed and thus establish the amount of tax payable. Therefore, to the extent you are claiming automobile expenses, meals and entertainment costs, or any other business expenses, you should retain the documents or invoices that support your expense claims.

Without these supporting documents, you may not be able to claim what would otherwise be valid business expenses against your source of income. In addition, if you are ever subject to an audit, good accounting records will save you time and money in dealing with Canada Revenue Agency (CRA) .

The failure to keep adequate records is also an offence that can result, on conviction, in a fine or imprisonment, or both.

The records supporting your expense claims should be retained for as long as the taxation years to which they relate may be subject to reassessment by CRA. In most cases for individuals, this will be 3 years after the date when the original assessment with respect to the year was issued.

If you would like more information regard the maintenance of adequate accounting records for the purposes of complying with income tax legislation, seek the advice of a Chartered Accountant.

The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.

Capital Dividend for the Incorporated Self-Employed

The non-taxable portion of a capital gain can be distributed by means of a special dividend referred to a "capital dividend". Capital dividends received by the shareholder are fully exempt from tax. Consequently, capital gains earned by a corporation and flowed through to the shareholder are taxable as if the shareholder had earned them directly, without the use of a corporation. The amount of tax-free capital dividends available for distribution is accumulated in a corporate tax account referred to as the capital dividend account. The capital dividend account is a running balance that includes the non-taxable portion of capital gains less the non-allowable portion of capital losses. To ensure that the account is maximized, pay out capital dividends when they come available before any capital losses are realized

If you would like more information regard paying a capital dividend, seek the advice of a Chartered Accountant.

The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.

Buying Capital Assets

Capital assets are grouped into classes, and capital cost allowance (CCA) can be claimed annually against each class. The "declining balance" method is used for most classes: the maximum you can claim against each class is a fixed percentage of the "undepreciated capital cost". What you claim then reduces that balance for next year's claim. For most acquisitions, only one-half of the CCA you could otherwise claim for the asset will be allowed in the year of acquisition. As a result, acquiring an asset just before your year-end will accelerate the timing of your tax write-off, while acquiring the asset at the beginning of the year will delay you CCA claim .

If you would like more information about the timing of your capital asset purchases, seek the advice of a Chartered Accountant.

The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.

Self-Employed Status

People who are self-employed, carrying on business for themselves, generally can take advantage of a wider range of available deductions than employees. One of the benefits is that if you are considered an independent contractor, you are not required to pay EI premiums or withhold payroll taxes on your income. You are neither required nor permitted to pay EI premiums if you carry on business for yourself. This will save you up to $1,853 in 2004 when taking into account both the employee and employer's portions. However, this means that if your consulting contracts terminate and you are left without work, you cannot benefit from EI.

Canada Pension Plan contributions, on the other hand, are required. If you are self-employed, you will need to pay the "employer's share" as well as your own share. This could be as high as $3,663 for 2004. You will, however, be able to claim a deduction for the "employer's share" of CPP up to the maximum for 2004.

The distinction between an employee and an independent contractor is not always clear. You would more likely be considered an independent contractor carrying on your own business as a proprietor if you:

• Agree to get the job done, but you don't make a commitment for any particular number of hours on any particular day.
• Work on your own with no supervision, and simply report back to the company periodically on progress.
• Issue invoices and receive cheques (with no source deductions for income tax, EI or CPP/QPP) and receive no employee benefits.
• Use your own equipment and work at home, going to the company for planning meetings only.
• Provide services to more than one company.

Each case will depend on its facts. Keep in mind there are various other pros and cons of being employed versus self-employed. Consult the advice of a professional.
The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.

When Your Children Work for Your Business

If your children help you run your business, you can pay them a salary and deduct it from your business income when preparing your tax return. The salary must be reasonable for the type of work performed.

Putting your kids on the payroll could mean deductions on your tax return, and may allow them to start accumulating RRSP contribution room which can be used to reduce their taxes in future years. The other advantage is that your kids may be taxed at a lower rate than you.

The Institute of Chartered Accountants of Alberta provides information for Tax Tips as a public service.