Are you self-employed and living in Canada? Here are Six top tax-saving strategies for self-employed, recommended by Toronto accounting firms. Many self-employed and business owners prefer to hire professionals for their tax-related queries; they have thorough experience and can often provide valuable feedback and expertise that can save individuals and businesses an ample amount in tax and expenditure.
1. Home office expenses
If you are self-employed and conduct your work from home, you may be eligible to deduct home office expenses. You can determine the portion of expenses that may be deducted by dividing the home office area by the total area of your house. You can deduct the following expenses from your household expense:
- Repair and maintenance
- Mobile device
2. Pay family members salary
Canadians who are self-employed can save corporate tax by employing their family members. This strategy is workable if you are earning more than your family members, as they will be in a lower tax bracket you can save on taxes.
Tax accountants can easily create pay slips and other salary evidence.
3. Individual pension plans
If you are self-employed and have a high income, it is advisable that you invest in an individual pension plan (IPP); this plan will allow you to continue living a lifestyle that you are used to living even after you retire, which is unlikely in registered retirement saving plans (RRSP).
An IPP is a pension plan that benefits high-income self-employed people and is registered with the Government and with the CRA as well. The pension plan will allow the investor a specific monthly benefit.
4. Lease a vehicle
Self-employed Canadians can save a huge amount on taxes if they opt to lease vehicles for their business; they can enjoy deduction on the following vehicle costs for tax purposes:
- Cost of fuel
- Maintenance of vehicle
- Insurance payouts
- Lease charges
- Toll charges
- The license cost of the vehicle
- Vehicle registration
There is a certain percentage of operating costs that are deductible; there is a mathematical formula that can be used to calculate them. It is important that you keep a log on a day-to-day basis of how much you drove your car for the business. The daily log should include the following:
- Date of the trip
- Location of the trip
- The purpose of the trip
5. Health and welfare trust
Self-employed in Canada can also save taxes through the health and welfare trust; this is a tax-free setup designed to provide the employees funded health care facilities. An account must be set up exclusively for your employee’s health care expenditure; that is the first step of creating a health and welfare trust.
- Funds can be withdrawn from the trust, and this will be tax-free, but the purpose of the withdrawal must be to pay medical expenses.
- Contributions that are made towards the trust are tax-deductible by your corporation.
Bookkeeping is important
All small businesses must have a dedicated bookkeeper or a tax accountant that keeps note of all the companies’ money coming in and money going out; if you have accurate bookkeeping records, you could even save taxes. Keeping a record of all expenses, documenting financial statements and personal tax returns. These taxes can be returnable.
Bookkeeping can make or break a business if not done properly; it is always better to outsource such an integral part of the company to Toronto accounting firms; professional tax accountants can monitor and record money in and money out of business better than the owner.
Frequently Asked Questions
How can I attribute office space and deduct its portion as rent if I have a home office?
You must ensure that you do not claim for more than the office space; a professional tax accountant can help in determining the actual amount deductible. The part of the house that you are claiming must be designated office space, and you may be asked to present a floor plan of your house upon audit by the CRA, according to Toronto personal tax accountants.
Is there any limit to the amount of lease of the vehicle that is tax-deductible?
The maximum amount of lease that can be deducted on a monthly basis is $800 + taxes; any amount above this is not deductible.
Are there any strings attached to employing family members in my own business?
Toronto personal tax accountants suggest that the terms of the employment must be realistic, it should reflect the conditions of real employment, and the amount of salary should also be reasonable. The salary must be properly documented and logged, so if the CRA requires evidence of payments at some point, they are available.
Why is pension savings plan better than a retirement savings plan?
The annual contribution of the IPP will be decided by an actuary and is even tax-deductible; the annual limit is far greater than that of an RRSP. The pension plan will allow the investor a specific monthly benefit.
Can I, being self-employed, incorporate my business to save taxes?
If you incorporate your business that has lower profit (considering that you are self-employed and earn near to what a good salary earner would), your business’s profit will be taxed at a low rate of 15%. On the other hand, the profits of an incorporated business are included in the taxable income of the owner; this is taxed at 53.5%. By incorporating your company, you are basically income splitting which will help you save on taxes.
If you are in Canada and have to do your self-employed taxes yourself, you can always get the help of a Toronto personal tax accountant or someone from a Toronto accounting firm who can help you leverage clauses that help in tax saving you might not have known about otherwise. Bookkeeping, tax filing, and tax returns can often be overwhelming and consist of too much information for a company owner to handle on their own, so it is always best to hire a professional who can help and guide you in the right direction, that is beneficial not just to you but also your company.