Tax Deductions Available to Independent Contractors

If you are considering becoming an independent contractor in Canada, you should be aware of many life and business implications before making the transition. Our trusted tax expert Arvind Seth shares important considerations, including available tax deductions, that will help you make an informed decision as you navigate the next steps of your career.

Already an established contractor? Review our list of common tax-deductible expenses below to ensure you get the most from your taxes.

What are the benefits and draw-backs of being an independent contractor?

Benefits

• Having autonomy and deciding who you do business with
• Setting your own schedule and hours
• Accessing the small business deduction for active business income (dependent on income thresholds)
• Deducting eligible expenses - The general rule is that an expense incurred for the purpose of earning income from a business is deductible, provided that it is a reasonable expense
• Paying yourself a mix of salary, bonus, and dividends and setting up an Individual Pension Plan and private health plan
• Opportunity to employ family members?(subject to certain strict tax rules)

Drawbacks

• Up-front costs to incorporate?
• Requires adequate working capital and work-related supplies to get the business off the ground
• Managing business risks including?finding work, negotiating contracts & collecting?payments
• Implementing a robust bookkeeping system to track accounting and tax-related data?

Crowe Tip:?This is essential to your business operations and will keep you organized if subject to an audit

• Managing cash flow needs related to current operations and projections for future growth
• Setting funds aside for taxes that will be owed, such as setting aside funds for tax obligations, payroll & GST/HST
• Not understanding the tax process and allowed write-offs
• Monitoring operations to ensure your independent contractor status is not compromised
• Longer hours without extra pay
• Unpredictable opportunities to take vacation
• Dealing with current tax regulations and other various compliance obligations
• Loss of employee-related benefits including pension plan matching, health benefits, employment insurance & severance.
• Responsible to pay all of the CPP contributions

Note: You can always obtain a ruling from the CPP/EI Rulings Program or review CRA’s publication Employee or Self Employed? to ensure that your working arrangement is clear before you begin working as a contractor.

Deductible Expenses Available to Independent Contractors

As an independent contractor, you are eligible to claim?certain expenses?incurred for business purposes on your taxes.

Deductible Expenses

Home office (as a percentage of your space vs. size of home)

• Mortgage interest
• Repairs
• Property taxes
• Insurance
• Utilities

Principal residence rules must be considered before converting space to a home office.

Vehicle

• Gas
• Toll charges
• Repairs
• Parking
• Insurance
• Tax depreciation

Supplies and tools

• This includes any supplies required to complete duties and activities associated with your field of work.

Computer and software expenses

• Computers can be deducted at a rate of 55% per year.
• Software is 100% tax deductible where 50% can be claimed in the year of purchase and the remaining balance can be claimed the following year.

Meals and entertainment

• This is generally deductible at a rate of 50% as long as you are meeting clients, suppliers, and prospects

Crowe Tip: Always be sure to keep your receipts, including the itemized receipt.

Travel

• Airfare
• Hotel
• Transportation (taxis, ride share, public transit, etc.)

Crowe Tip – Tracking Income and Expenses

To stay organized, keep all your receipts in one spot and use Crowe MacKay’s fillable form where you can easily input your income and expenses when submitting your taxes.

Personal Services Business

Organizations that have incorporated or are considering to incorporate may be deemed as a personal services business (PSB). Generally, PSB’s are viewed differently by the CRA and will have different tax obligations -?real estate professionals?are a great example of PSB.

Overview of the PSB Criteria

• Income of the business is derived from those services rendered by an individual (commonly referred to as an “incorporated employee”) and that person is also a specified shareholder (that is owning 10% or more either directly or indirectly of the company or related entity);
• The incorporated employee is an officer or an employee of the company for which services are being provided if the corporation were to be “disregarded;” and
• Throughout the year, the corporation did not employ more than five full time employees.

Learn more about the PSB criteria

Personal Services Business Tax Obligations

When the PSB rules are in effect, the income derived from a PSB will?not be eligible?for the?small business deduction. Certain deductions usually claimed by a corporation against PSB income will likely be restricted as well. Therefore, the corporate income tax rate for PSB income will be higher.

There are strategies available to navigate this complex area that are beyond this article. If you require assistance with this, or any other topics presented through-out this article, connect with us in Alberta, British Columbia, Northwest Territories, or the Yukon.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.

If you are looking for?Tax Services, Crowe MacKay provides personalized support. Our tax professionals will help you maximize tax-planning opportunities and ensure the minimum amount required by law is paid.