Self-employed workers should develop a system for filing tax-related material such as invoices and receipts.diego_cervo/iStockPhoto / Getty Images
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The deadline for filing taxes in Canada for 2024 is April 30. As the big day approaches, Globe Advisor and Globe Investor have teamed up to offer advice on how to maximize returns, find credits and avoid an audit. The full series can be found here.
More than 2.6 million Canadians are sole proprietors, meaning they’re the only owners and operators of their businesses.
But while self-employment brings new opportunities and independence, taxes can be complex. With multiple clients, different income streams and countless receipts, sole proprietors may require advice on several tax-related topics, from GST/HST to home office expenses.
“It can be an administrative nightmare,” says Sunny Widerman, chief executive officer (CEO) of Personal Tax Advisors in Toronto.
She says self-employed clients take different approaches to their taxes. Some forget to keep their receipts or store them improperly. Others fail to pay any outstanding taxes when they’re owed in April – a mistake that leads to late-filing charges.
“Most people want to go too far,” she says, erroneously claiming things such as gym memberships and clothing.
The key is to set up a simple system for filing tax-related material such as invoices and receipts, Ms. Widerman says. And self-employed tax filers should consult with a tax professional if they’re unsure. Here are some tips they should consider for tax season.
1. Use common sense
While clothing and gym memberships aren’t allowable, certain expenses such as meals and alcohol should be “reasonable,” Ms. Widerman says. That means if an outside observer thinks the amount claimed is excessive – such as three bottles of wine at a dinner for two people – one bottle should be claimed.
2. Handle receipts with care
Sole proprietors should develop an easy method for storing and organizing receipts for things that can be claimed such as meals, tools, computers, medical expenses, office supplies and vehicle expenses.
Ms. Widerman suggests clients should, at the bare minimum, take a “shoebox” approach in which all receipts are placed in a file or box. She tells her clients to photocopy receipts and store them carefully.
“These have to be legible seven years from now,” she says, referring to the period during which the Canada Revenue Agency (CRA) can order an audit.
Ronika Khanna, founder and chartered professional accountant at Montreal Financial, recommends to her clients that they go further, scanning all receipts and keeping the scanned copies in a labelled folder on their desktop and saved to the cloud. She also recommends using inexpensive accounting software, also a business expense, to itemize each receipt.
Each business meal receipt should have a reason for the meal as well as the name and contact information of the co-diner, says Ms. Khanna, who is also an author.
3. Separate business and pleasure
Ms. Khanna says clients should create a separate business bank account to avoid mixing up personal and business funds.
“It helps if you have everything related to the business in one place – plus it’s audit-friendly,” she says.
Danish Yusuf, founder and CEO of Zensurance in Toronto, says sole proprietors should also use business credit cards exclusively for business purchases. “Separate as much as possible.”
4. Estimate how much taxes you owe
Ms. Khanna advises against waiting until filing to determine what taxes should be paid. She tells clients to estimate what they’ll owe using online tax calculators and to set that money aside in their business bank account. For sole proprietors earning more than $30,000 annually, the CRA requires quarterly tax instalments based on the previous year’s income.
5. Get GST/HST sorted out
Ms. Khanna says many people don’t realize that GST/HST payments are completely separate from their taxes. Sole proprietors making more than $30,000 need to register for an HST number and make quarterly GST/HST payments, in addition to any taxes they owe. She recommends using a spreadsheet to track any GST and HST collected.
6. Capitalize on the home office
As office expenses can be a significant tax deduction, sole proprietors need to calculate the size of their workspace and the percentage of the total home it represents, Ms. Khanna says. They can then claim rent or mortgage interest, utilities, insurance, property tax and utility costs for this space.
7. Track your car expenses properly
Claiming car expenses can be tricky, especially if the car is being used for personal and business travel interchangeably, Mr. Yusuf says. He recommends a logbook to note carefully when the car was used for business travel, the distance travelled and why the trip was made. This logbook can be invaluable in the event of an audit.
8. Pay taxes on time
Many sole proprietors realize they don’t have the funds to pay their tax bill, so they don’t file their taxes.
“It’s a mistake to not file until they have the money,” because there’s a late-filing penalty, Ms. Widerman says.
She notes tax payments can often be deferred, and that not filing taxes on time can start a vicious cycle of not filing subsequent tax returns.
The deadline for sole proprietors to file their 2024 taxes is June 17, but those who owe taxes are required to pay by the regular April 30 tax-filing deadline.
Staying organized, keeping track of expenses and filing on time should help sole proprietors avoid an audit, Ms. Widerman says, adding that most audits are triggered by three years of losses, not mishandled deductions.
As for those who have been putting off filing their taxes, no situation is unsolvable, she says. “It should be dealt with.”
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