Small business owners, and those who work freelance or are self-employed must submit an annual tax return to the Canada Revenue Agency. Most people only focus on their taxes a week or two before they are due, but you should really be thinking about them all year round so that you maximize your deductions and credits thereby reducing the amount of taxes that you have to pay.
Here are five common mistakes that self-employed people make when filing their annual return.
1. Failing to Write off Business Expenses
As a self-employed person the CRA allows you to deduct reasonable expenses that you incur while earning business income. These expenses include start-up costs, business fees, memberships and subscriptions, salaries, wages, employee benefits, accounting legal and other professional service fees, telephones, utilities and office expenses. If you use your vehicle or home for business, you may be able to deduct related expenses for these too. It is important that you are aware of which expenses you can deduct to have a lower taxable income, but you should also make sure that the expenses you are claiming are reasonable so as not to attract a CRA audit.
2. Claiming Expenses that are not Deductible
If you claim expenses that are not deductible the CRA sees it as a failure to report income which can mean a reassessment and interest and penalty charges on the unreported income. Make sure that you are fully aware of the expenses that you can claim when submitting your return.
3. Forgetting to Track Your Expenses
Just keeping receipts in a box is not the best way to track your expenses. You should be keeping records of all your expenses as they occur. Use accounting software or a smartphone app to record everything immediately. At tax time you will have a more comprehensive record which will make doing your return so much easier than trying to remember what each receipt was for long after the purchase.
4. Failing to Report Cash or Trade Payments
If you receive payment for work by cash or trade, you must still report it. Failure to do so can result in severe penalties from the CRA. These can include more assessed taxes, interest and penalties, court fines and even jail time.
5. Insufficient Proof Related to Meal and Entertainment Costs
Self-employed people can claim a partial deduction for meals and entertainment. This is 50% of expenses incurred to expand your business or for travelling for work. You may also be able to deduct all of your expenses for holding a holiday party for your employees or for buying food for a charity dinner. If you are a long-haul truck driver you can claim 80% of your meal expenses and self-employed couriers can claim a flat rate of $17.50 per day.
Just saving receipts for these expenses is not enough for the CRA. You must be able to prove that they were necessary for your business. You should record information such as the event, who came, what was discussed and how it relates to your business on each receipt. In addition, credit card receipts showing the amount that you paid must be accompanied by a restaurant or event receipt showing what was purchased. Truck drivers and couriers should record expenses along with mileage in a log book with information showing where they travelled and where work was done.
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