Jun
2
By Fin MacDonald
Why do the self-employed have until June 15 to file the previous years tax return? The answer goes back to the time before 1995, when self-employed people could choose any year end date for their tax returns. This enabled people to avoid a busy year-end season but it also provided the opportunity to have an early year year-end. This enabled, for example, income earned in February 1994 with a January 31 year end, to be reported not until April 30 of 1996 (on the 1995 tax return).
There was a phase in system that allowed an extra 10% of income to be added each year, over the next 10 years, so that there was not the requirement to report 23 months of income in one year.
The June 15 filing date is the one provision that has remained, enabling self-employed the extra time to complete their returns. If you or your spouse are self-employed, you both have until June 15 to file.
HOWEVER, ALL TAXES OWING WERE DUE BY APRIL 30!!!
Self employed people have certain tax advantages. When a self-employed person reaches the point where, even with the tax advantages, the taxes payable are too high, it may be time to talk to a tax specialist about incorporation.
Disadvantages of Self Employment
Beyond the uncertainty that defines self employment, especially in the early years, there are a number of disadvantages from a tax and benefit point of view.
Canada Pension Plan premiums for an employed person are 4.95% of employment income upto a maximum of $2,217.60 per year - for the self employed the rate is 9.9% upto a maximum of $4,435.20.
The new Post-Retirement Benefits from CPP will be discussed in the next issue of the Beacon.
Employment Insurance for sickness, maternity, compassionate care and parental benefits are available to the self employed but only after a minimum of one year of premium paying. Once benefits have been claimed the self employed person must then continue to make the premium payments as long as they have employment or self employment income, while never been eligible for Regular Employment Insurance Benefits.
A self employed person may have to make quarterly instalment payments, with interest charged if they are not on time or sufficient.
Tax Advantages of Self Employment
Most expenses that are used to earn self employment income are eligible as deductions. Also eligible are certain other items that the self employed would pay for in the normal course of things such as vehicle and home office expenses. Particularly in the early years of self employment large business losses are not unusual - losses that may be used to offset other income.
This is especially true for professionals, who in BC are allowed to incorporate. Large student loan and other debts can be used to reduce tax otherwise payable as well as the costs of establishing one's practice. Once these expenses are exhausted, incorporation is a natural tax move.
Some examples of expenses that may be claimed are
- Advertising
- Entertainment and meals (50% only)
- Loan Interest and bank fees
- Rent and office expenses
- Motor vehicle expenses
- Travel and convention expenses
- Utilities and property taxes
Depreciation on motor vehicles, plant and tools is also an important potential expense. Standard rates for depreciation are set by law; rates that may be much more than the actual expense.
Spouses and children may also be employed in the business but only to the extent that their wages are 'reasonable'.
Sitting down with a tax professional to explore all the potential costs and deductions of your self-employment is one of the best investments one can make, and is also tax deductible!
Helping you to keep more of your money is the reason I write these columns, If you have any questions or suggestions for future columns I may be reached at FinTaxService @hotmail.com.
Next, in the July-August issue: Changes to the Canada Pension Plan and Potential Increases in Provincial Income Tax as the HST ends on March 31, 2013