By Adrineh Der-Boghossian
In this two-part series, I summarize some of the information that the Canada Revenue Agency (CRA) Liaison Officer Charbel Saab shared with participants at an online presentation hosted by Editors Nova Scotia on January 22. In Part 1, I explored the tax forms small businesses are required to complete, the books and records they are required to keep, and the revenue and expenses they are required to report.
Part 2 lists the common errors small businesses make, from overclaiming expenses to failing to register and collect GST/HST. As a new business owner, I found the information below incredibly helpful.
Common errors that small businesses make
Small businesses often overclaim these expenses: business-use-of-home, motor vehicle expenses, utilities, capital cost allowance, and meals and entertainment. I’ll explain a few of these in greater detail below.
Business-use-of-home expenses—for example, electricity, heat, maintenance, property taxes, and rent—are deductible if either
(a) your home is your principal place of business or
(b) you use the space only to earn business income and you use it on a regular and ongoing basis to meet clients.
But remember that only the portion used for and during work can be claimed. That is, the business owner has to consider not only the workspace area versus the total area of the home, but also the amount of time spent in the area doing work.
For example, in a home with an area of 1,800 square feet and a workspace of 180 square feet, 10 percent would be the allowable portion of business-use-of-home expenses. Simple enough, right?
But if the workspace is used only seven hours a day for five days a week (or 1,820 hours in a year), then the allowable deduction is, in fact, only 20.8 percent of that expense (1,820 divided by the total number of hours in a year).
In other words, if the total yearly home maintenance cost is $13,000, then the allowable deduction based on workspace usage is $1,300 (10 percent of $13,000). Adjust that by the amount of time you spend working, and the actual amount you can claim is $271 (20.8 percent of $1,300)—a much smaller number than you started with.
Other common calculation errors include the deduction for capital cost allowance (CCA), applied toward depreciable property. Though CCA includes buildings and furniture, for editorial freelancers, depreciable property usually means equipment such as a computer or a printer. The cost for these big expenses can be deducted over time. As with other expenses, you deduct only the portion you use for work, but unlike other expenses, there’s a half-year rule: you claim half (not all) of the allowable deduction in the year of purchase.
For example, say in a given year you spent $2,000 on a new computer, which you use 75 percent of the time for work, resulting in an underappreciated capital cost (UCC) of $1,500 at the start of the year.
To calculate the amount you can deduct in that tax year, you have to first consult the rate the CRA has determined for that CCA class. In this example, software and hardware is Class 50, which has a rate of 55 percent. This translates to $825 (55 percent of $1,500). However, considering the half-year rule, you would be able to claim only half of this amount: that is, $413.
Then in the following year, you would deduct the amount claimed from the previous year ($413) from the UCC of $1,500. Then multiply it by 55 percent to arrive at the deduction for that tax year: that is, $598.
There are, however, some new rules for property acquired after 2018, such as an accelerated investment incentive, which suspends the half-year rule, and full expensing for clean energy investments. I recommend visiting the CRA web page Claiming Capital Cost Allowance (CCA) for more information.
Finally, Saab reviewed common errors in meal and entertainment expenses. Though we may not have many of these to claim for 2020, it’s helpful to know that the maximum allowable deduction for this expense is limited to 50 percent of what you paid. So if you took a client out for dinner, you claim 50 percent of the total bill (including alcoholic beverages and the tip). But if the client paid for their own meal, you claim 50 percent of your portion only.
Other deductible expenses include conventions, no more than two per year, and travel (transportation, meals, and hotel), but only the portion related to your business.
Common GST/HST errors that small businesses make
Saab also covered common errors that small businesses make in GST/HST, such as failing to register, collect, or remit GST/HST on sales after surpassing the small supplier threshold of $30,000 in gross revenue in a single calendar quarter or over four consecutive calendar quarters.
Another rule to keep in mind is that the amount of GST/HST charged is based on where the client is located. Therefore, an Ontario-based freelance editor providing services to a client in Nova Scotia would charge them an HST rate of 15 percent (the tax rate in Nova Scotia). Note, clients abroad are exempt from GST/HST.
For general information about filing your taxes as a small business or a self-employed individual, read last week’s post, Recap: Tax Help for Small Businesses and Self-Employed Individuals (Part 1).
Adrineh Der-Boghossian is a professional copy editor and proofreader offering services to publishers, small businesses, and non-profit organizations through her company More Than Words. She is an active member of both the Chartered Institute of Editing and Proofreading (CIEP) and Editors Canada, where she volunteers as the proofreader for The Editors’ Weekly.
This article was copy edited by Ambrose Li.