Home Business Taxes

Some Common Questions and Answers

As a small business owner in Canada, home business taxes are something you need to address.

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Questions arise about what tax deductions are available to you when you work from your home. I have a written a series of articles on Home Business Taxes in Canada that you may want to spend some time reading.

Quick Links to Home Business Taxes Q&A

Here are quick links to some commonly asked questions and answers on Canadian home business taxes.

Automobile Expense Related Questions

• Does the $.52/km employee mileage allowance include GST? Can we claim GST tax credits on this expense when paid to us personally?
• Can I claim auto expense if I do not have business coverage?

GST/HST Questions

• Do you have to charge GST/HST on internet sales, web hosting and web design in Canada?
• Do you charge GST/HST on the sale of a business asset such as office equipment?
• Don't I pay more income tax if I voluntarily register for GST?
• What organizations are GST exempt?

Home Office Questions

• What are the rules for business use of my home phone in Canada?
• What percentage of my telephone and power can I deduct on my tax return?

Sole Proprietor Questions

• Are business owners subject to CPP?
• How do you input/report owner's draws on your personal tax return?

Self-Employed Tax Deduction Questions

• Are bookkeeping service fees tax deductible in Canada?
• Are life insurance payments a tax deduction in Canada?
• Are tax penalties a deductible expense in Canada?
• Is my receipt log book considered as legitimate receipts for my Canadian tax return?
• Are country club dues deductible or not?

Home Business Taxes Q&A

Q. As an incorporated business we have chosen to use our personal vehicle for business and charge $.52/km for mileage. Most of our contracts cover travel expense and we bill this mileage to clients.

Does the $.52/km include GST/HST? Can we claim GST/HST tax credits on this expense when paid to us personally?

A. This site visitor and I had a few emails back and forth on this. On my recommendation, a GST ruling was requested. This response is information obtained by GST Rulings Vancouver that was kindly shared with me.

Pertinent facts:

• Incorporated GST/HST registrant business will be referred to as "business".
• By contract agreement with GST/HST Registrant "client", all reasonable travel expenses covered for contract work.
• Personal vehicle used by business owner as "individual" for some of this travel.
• Mileage paid to "individual" at CRA published rates is deemed reasonable rates and only for approved business expenses. These payments are not part of personal taxable income.

Therefore:

• As these expenses are not part of the "individual's" taxable income , the "business" can claim ITCs which are built into the reasonable expense.

  See CRA website reference: G400-3-11 Allowances and Reimbursements (GST 400-3-11):

  "13. Where a registrant pays a reasonable allowance to an employee or a member of a partnership for the use of a motor vehicle in Canada, and where no amount is included in computing the individual's income for income tax purposes, the registrant is deemed to have paid tax equal to 5/105ths of the amount of the reasonable allowance."

• Since CRA does not care what the "Business" bills the "client" for these expenses, who have agreed basically to cover the expenses, the "business" can bill the "client" at such a rate as to only recover these expenses.

  So as the reasonable rate set by CRA is $.52/km, the "Business" bills the "client" at $.495/km and collects 5% GST on that invoiced amount, then they are only recovering the $.52/km going to the "individual".

So one of the things that is important to point out here is, if you are unsure how to treat a certain transaction with regards GST/HST when dealing with your home business taxes, one option available to you is to call or write and ask for a GST Ruling on your specific circumstances.

Q. Are business owners subject to CPP?

A. The answer to this home business tax question is yes. Here are some links for more information for sole proprietors:

CPP premiums for sole proprietors

Schedule 8 CPP Contributions on Self-Employment or Other Earnings

If you are incorporated, you are an employee. Find out more here keeping in mind you will be reporting your tax information on a T2 not a T1:

Employee Payroll Taxes

Q. Are bookkeeping service fees tax deductible in Canada?

A. Yes. You can deduct them on line 8860 Professional Fees on Form T2125 Statement of Business or Professional Activities.

Q. Do you have to charge GST/HST on internet sales (online sales) in Canada? Have you been wondering what CRA's views on virtual income and expenses are?

A. Canadian electronic income (income earned online) is treated the same way as traditional commerce income. Income taxes and value added taxes (GST/HST) apply to both.

When CRA talks about virtual or electronic commerce, it relates to supplies made and transacted over the internet. For their purposes, there are two types of electronic supplies:

• supplies of intangible property; and
• supplies of a service.

For the purposes of GST/HST:

• Web hosting and web design are considered a service (not a telecommunication service which has different supply rules).
• Downloads (digitized products) are considered intangible property.
• Packaged software is considered a good.

If you are shipping goods inside of Canada that were ordered online over the internet, GST/HST applies.

After June 30, 2010, the general rule if you are electronically selling services or intangible property to a Canadian resident is ... the GST/HST rate applies according to the location of the end user/customer. As of July 1, 2010, it is no longer based on the location of the where the service originated.

Check out my side bar article on GST/HST Tax Rates to Out of Province Sales for more details. These rules apply to online internet sales (sales made by electronic means) including digitized products like eBooks and services such as web hosting and web design.

If you are shipping goods outside of Canada that were ordered online over the internet, the goods are zero rated (which is different than exempt) and therefore NO GST/HST is collected.

The general rule if you are electronically exporting services or intangible property to a non-resident person (defined as the billing address is outside of Canada without a permanent establishment in Canada) who is not a GST/HST registrant, you do NOT charge GST/HST as it is zero rated.

I understand this to mean electronic supplies (intangible property and services) are zero rated if exported.

Check CRA's GST/HST Technical Information Bulletin B-090 GST/HST and Electronic Commerce for more details.

It is worth mentioning that eBay sellers will be selected for audits this fall. This income should have been reported on Form T2125 when filing your personal tax return ... and applicable GST/HST should have been collected and remitted.

See "The Tax" section for my series on Home Business Taxes for more information on how to prepare your tax return.

My article on A Guide to GST/HST explains how to register for and submit a GST/HST report.

If you feel you need specialized advice in this area, you may want to visit the website of David Sherman, Canadian tax lawyer.

No one said home business taxes in Canada would be simple.

Q. Do I charge GST/HST on the sale of a business asset such as office equipment?

A. The answer to this home business tax question depends on your GST registration status. The general rule is ...

... if you are a GST/HST registrant, you must charge GST/HST on taxable goods if the goods are sold in the course of your business activities.

... if you are not a GST/HST registrant, you do not charge the GST/HST on the goods sold.

... if you are the owner of a business and the goods you are selling are NOT related to your business activities, you do not charge HST/GST on the sale of goods.

Q. Don't I pay more income tax if I voluntarily register for GST/HST?

A. Here's my understanding of how GST/HST works to lower your total home business taxes.

I. Sales under $30,000 and you are not registered

You have sales of $1000 on which you cannot charge GST and expenses of $675 on which you paid GST of $33.75.

Net Profit to you is $291.25.You pay income taxes on this amount (which you can reduce by considering other deductions that are available such as CCA, home office expenses and business use of your personal vehicle).

Federal income taxes would be $43.69 ($291.25 x 15%) as I assume your total taxable income is under $40,726 (2009 maximum for 15% tax rate). I won't bother with provincial tax for this example.

II. Sales under $30,000 and you are registered

You have sales of $1000 on which you charge $50 GST and expenses of $675 on which you paid GST of $33.75. Net Profit to you is $325.00. You pay income taxes on this amount (which you can reduce by considering other deductions that are available such as CCA, home office expenses and business use of your personal vehicle).

Federal income taxes would be $48.75 ($325 x 15%). Again, I won't bother with provincial tax. So you are right in thinking you are paying higher income taxes.

However, you also submit your GST report as follows:

GST collected $50.00 and GST paid $33.75. Amount owing to CRA is $16.25 as you claim the input tax credits. During some periods when your sales are slow, your expenses may exceed your sales. Then you would receive a refund.

So now total taxes paid are:

Federal income taxes would be $48.75 ($325 x 15%).

Subtract ITC refund $33.75 received after filing report = $15.00 in total taxes paid.

A total home business tax savings of $28.69 ($43.69 - $15).

After taking into affect the GST ITC refunded, you now have paid less tax because GST is a neutral tax to GST/HST registered businesses. That's how I look at it.

If you had registered for GST/HST during the startup of your business, you could have claimed all of your ITCs from startup and received a refund.

Check out how you can recover some of your ITCs if you weren't registered at startup ...

Q. Where do you input / report owner's draws on your tax return?

A. As a sole proprietor, your drawings are reported at the bottom of page 3 of Form T2125.

Home Business Taxes, A Tax Planning Opportunity explains how you are taxed.

How to Create an Audit Trail explains how to record any draws you take.

Q. Are life insurance payments a tax deduction in Canada?

A. Life insurance premiums are not a tax deduction because the funds paid out are tax free.

Check out 12 other items that are not tax deductible.

Q. Are WCB penalties tax deductible in BC?
Are tax penalties a deductible business expense in Canada?

A. Sorry, no they're not.

Read more about more items that are either not deductible business expense or have limitations in this home business taxes article.

Q. Is my receipt log book considered as legitimate receipts for my Canadian tax return?

A. It is my understanding that a receipt log book is valid for services where a receipt is not normally issued ... otherwise you need to keep to your receipts as supporting documentation.

If your receipt log book is your only transactional recording system for your business, consider it to be like a bookkeeping ledger which an important part of bookkeeping records. CRA will want to look at it just as they would any bookkeeping ledger.

You may be interested in reading Creating An Audit Trail for more information on what constitutes a legitimate receipt and the use of log books.

You may also want to read about what records you must keep for the Canada Revenue Agency as you prepare your home business taxes.

Q. Are country club dues deductible or not?

A. Sorry, no they're not. Read more about dues here ... but CRA has changed their position on meals at the clubhouse.

Q. I have a home based business but my home has only one phone line. What are the rules for business use of your home phone in Canada? Can I deduct it?

A. You can deduct some expenses of your home phone line, if you use it for business, when you don't have a separate business line. Find out more about the restrictions on deducting business use of your home phone line here.

More information on where to claim the deduction for business use of your home phone on your tax return can be found in Part 2 of this article on Home Business Taxes.

Q. As a Canadian farmer, what percentage of my telephone and power can I deduct on my tax return?

A. The CRA Interpretation Bulletin IT-514 Work Space in Home uses farmers (and contractors) as their example. How to calculate your allowable office expense claimable for operating your farming business with your home as your principal place of business is explained. Here is an excerpt:

"The work space in a farmer's home utilized to operate the farming business would normally be the farmer's principal place of business. The room used by the contractor and the farmer's work space could also be used for personal purposes since they need not be used exclusively for the business in order to meet the 1(a) requirement."

You will find how to prorate home office expenses here. Use business use - criteria one for your calculation.

Make sure you read the restrictions on deducting your home phone line before doing your home business taxes.

Q. What organizations are GST exempt?

A. As of July 1, 2010, the federal government, participating provinces, PEI and Nunavut governments and municipalities pay GST/HST on taxable goods and services. The remaining provinces and territories, including their Crown corporations, boards, commission, agencies and departments or ministries, do not pay GST/HST if they provide certification.

Federal and provincial governments ... and public service bodies - PSB (charities, municipal, universities, public colleges, school and hospital authorities, not for profit organizations) have to charge GST/HST on their taxable goods and services. PSBs may qualify for small supplier rules and rebates.

Go to CRA's website for more information and exceptions at A to Z index> GST/HST> G> Governments - Federal, provincial, territorial and municipal

Prior to this date ... this is not my area of expertise as I deal mainly with small business ... so don't take my word on this ... but here is my understanding.

Public service organizations were generally GST exempt which meant you were not be required to charge or be charged GST. This includes government organizations at all levels:

• federal governments
• provincial governments
• territorial governments
• municipal governments

Charities (if not a GST registrant) are not required to collect GST and may claim a 50% GST rebate on eligible purchases by filing form GST66 - Application for GST/HST Public Service Bodies' Rebate and GST Self-Government Refund.

Non-profit organizations must collect GST/HST and are eligible to claim ITCs.

Q. Can I claim auto expenses if I do not have business coverage?

A. As far as I know, if you use your vehicle for business purposes, you can claim your auto expenses related to your business portion usage only, even if you don't have business insurance.

You must have an auto log to support your business use and all your original receipts must be kept.

You may want to consider the risks you are taking by not carrying business insurance for your vehicle if you are using it for business purposes.

Go to "The Tax" section to read more about Home Business Taxes and your vehicle.

Check back as more questions and answers on home business taxes will be added.

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