Hello,
so how does it work in regards to taxable income? For example say you had $15,000 in total income and $5,000 in expenses, does Revenue Canada look at that as $10,000 in total income? Or is there some formula to calculate the total amount of expenses you can claim? Do different expenses count differently if so? For example adverts, gas, food? Thanks.
Wow, a GD question that I know the answer to … I had to get out of lurking mode and register so I can answer this one.
First, the obligatory disclaimer. I am not an accountant, though I do run my own bookkeeping business. However, you are not my client, and this is not financial advice. For more information, please talk to an accountant. I operate out of B.C., which may or may not change some of the applicability of the answers I give.
And the answer in short, is yes, depending on the type of industry you are in. There are seperate rules if your business is in farming, fishing, rental properties, or certain professional businesses. However, if you are not, then your business income as a sole proprietorship would be reported on your T1 as income, and you can claim “any reasonable expense you paid or will pay to earn business income.” However, you cannot deduct any personal expenses. The line between where a personal and business expense can be quite fuzzy, and should really be tailored to your situation but a professional. For example, some expenses (like a home phone) may be partially used for business, and a certain percentage my be eligable for a write off, while the balance is not. So, there is no one formula, instead there are many that apply.
The usual list of expenses that are normally considered business expenses are advertising, amortization, bad debts, licenses and memberships, business use of home, equipment leases, freight costs, fuel, insurance, interest, professional fees, repairs & maintenance, meals & entertainment costs, motor vehicle costs, office expenses, taxes, wages & payroll taxes, travel, and telephone and utilities. Now, not all of these can be claimed at 100%. For example, meals and entertainment costs are only a 50% write-off, and must be for business purposes, an area that the CRA is starting to crack down on hard in audits. For more info on elegable expenses go to the CRA’s web page at
http://www.cra-rc.gc.ca/tax/business/topics/solepartner/businessexpenses/menu-e.html
Another area that will adjust your expenses are GST. Assuming that you had $5000 in business expenses, you paid roughly $300 in GST. If you have a GST number, that amount can be used to reduce the amount of GST you remit to the government from what you collected with your business income.
Also, if any of your expenses are for capital assets (buildings, vehicles, computer, large equipment, etc.) they cannot be claimed as expenses. However, depending on the class of the asset, a certain percentage of the value can be claimed as a depreciation expense called capital cost allowance (CCA) on a declining balance basis. So if you buy a truck for $10 K, you can claim an expense of $3K (a vehicle is a class 10 asset, which has a 30% CCA) on your first year, then $2100 for the next year, $1470 the next year, etc, until you have used up the amount you paid for the asset.
So, when all the bookeeping is done and all the transactions are recorded, you end up with a figure that is close to, but not the same as, your income less your elegable expenses. You then fill out your forms with the CRA, and report the income and the expenses on your tax return, and it gets treated as taxable income.
For more info on dealing withe the CRA on running a Sole proprietorship, check out the CRA’s web page devoted to the subject, Canada Revenue Agency/Agence du revenu du Canada - Canada.ca
One point is that you can deduct 30% of the current undepleted value of a capital asset until the end of time and you will never deduct it all. My wife had a computer that she deducted whatever, maybe 20% of the undepreciated cost for five years and then sold to a friend for $25 at which point she was able to deduct all the rest (except, of course, for the $25). I assume you could also junk it, but I don’t know how that works. She is a freelance translator working alone and her deductions amount to no more than 10% of her income, so nobody pays any attention to her deductions. She deducts, for example, half the phone bill (which includes the DSL line) and, so far, no one has objected. Who knows what is fair in such a case?
On the other hand, Quebec is really nasty as they allow only half the costs in running a home office even if it is your only place of business. As a result, we feel no compunction in ripping them off any time we can. Quebec is the only province that has its own tax system. The other provinces just suck off a percentage addition to your federal taxes.
Not true. Given my hypothetical $10,000 truck, at a 30% declining balance, after 42 years, it would have depreciated to less than half a cent, which is zero as far as the accountants are concerned. Assuming that you’d want to get rid of it before then, you can dispose of it at any time and write off the unamortized value as a loss on capital assets instead of as a CCA expense.
As for nobody paying attention to deductions, that’s only until you get audited. Then you find out where ‘fair’ is. 
With penalties and interest.
Yeah … Quebec’s tax laws suck. I’ve had to deal with them for a previous job, and I think a root canal without anasthetic would be a comparable experience.
Mithrander the Grey glad to make you get out of lurking mode :). Thanks for the answer. The company I currently work for wants to change to a contract basis, forcing all employees to set-up a soleproprietorship (or however its spelled), and then bill them by the hour. They claimed, in the meeting we had, that this would allow us to make more money as we can write off all of our expenses. My expenses are basically gas, insurance and the very occasional client lunch due to my current living/auto arrangements. The OP is basically what they said would happen. Your answer clarifies things. They obviuosly left some things out, and I know have to decide if its worth going through all the trouble of setting up a company, or if I should just look for a better job (the commute is a real bitch). Thanks.
No worries. I’ve been meaning to register and actually stop lurking for oh … about four years now. I tend to lurk in GQ, and on the occasions where I know an answer, I’ve already been beaten to it. When I saw your OP, I just had to jump all over it. 
Now that I know the details of your situation, I can give some more info. Please don’t take this as financial advice though, previously disclaimers still apply, etc.
If your rate of pay remains the same, but you are now a contracter, you are probably getting the shorter end of the stick. As an employee, you have certain rights. As an sole proprietor, you have (mostly) liabilities. Also, you can then be let go without notice, have no guaranteed hours, and are responsible for your own company share of CPP (140% of what you normally get deducted from your check), and are not eligable for EI. There would be no more paid vacations (losing my paid stats really hurt) including annual vacations. There is also increased time overhead on your behalf, since you will need to start keeping records detailing all your expenses, collecting and remitting GST, (and possibly provincial sales taxes, depending on your business and provincial laws) as well as having possibly having problems when trying to get credit. (My bank won’t touch me for a loan until I’ve been self-employed for three years) You won’t have any paid benefits, and unless you get a payroll account from the CRA (which takes more time and is more paperwork to deal with), you’ll have to save your tax dollars and pay it off in one lump sum come tax time. The biggest one for many people is that unless your contract says otherwise, overtime regulations no longer apply to you.
And since most of your expenses are for automobiles, you will have to keep track of your mileage to prove what percentage of your vehicle use is for business instead of personal use. You will be able to write off a percentage of your costs (licence and registration fees, fuel and oil, insurance, maintenance, and interest on a loan to get a vehicle) that is equal to the ratio of business use to total use. This can be significant or very little, depending on the situation. Meals are only 50% deductable, and only if you can prove that meal was for business purposes. (Hint: write who you are meeting with and why on the back of your reciept)
I don’t know about Quebec, but in B.C, you also have to pay money to register your business name unless you do business under your own name.
So, in the end, will you save money? Well, it depends, but there’s a bunch of work involved in it. (That’s how I get paid, by people who don’t want to/can’t do that sort of thing themselves) The one thing I can say is that for sure is that if your hourly rate stays the same, the company you work for will save a bunch of money. GST (and even w/ PST if applicable for your business) is cheap compared to paid stats, annual vacations, matching CPP and EI contributions, paying someone to calculate payroll deductions issue T4’s and ROE’s, and any benefits that they might pay all or part of.
Yeah, that was kind of what I thought, no way would I REALLY come ahead in this thing, or why wouldn’t everyone do it? I think I will start looking for a new job.
Well, it is possible to come out ahead. The key is that for all of the self employed people I know, they charge more as an independant than would take as an hourly wage. (Usually 20-40% more) If you have a large number of expenses, or very expensive ones, it really can pay off. I would have to say that out of all the millionares that I know, all of them were either self-employed or owned their own business.
And once you make a certain amount (past about 60-75K annually), if you incorporate instead of going to a Sole proprietorship, you can allow the business to keep some of the money since it will pay a lower tax rate than you will as a person. Also, chosing when you receive your personal income can have some nice tax advantages.
The down side is the loss of security and the headaches involved. That is probably the reason most people don’t do it.