Tax season may offer the self-exployed a chance to reflect on the year’s successes as their own boss but it also provides a wake-up call for the true cost of freedom.
“We hear about the benefits: the freedom to determine your own schedule, the workload, being your own boss, the fact you have more deductions but (there’s) another side of the coin,” says Curtis Davis, Director Tax and Estate Planning with Mackenzie Investments. But you also inherit your bosses responsibilities of keeping tabs on expenses and the income tax bill you’ll owe at the end of the year.
And that means keeping very detailed records, says Davis.
“If the arrangement is set up as an independent contractor you are self-employed, so a lot of your costs expenses related to providing that service are deductible against the income,” he says. In the case of someone using an app like SpaceiShare to rent out their garage or listing a spare bedroom on Airbnb, those receipts can help offset some of the income you made.
“Say that room is ten per cent of your total square footage, then in a lot of cases you can deduct ten per cent of expenses related to that space like interest on your mortgage, your hydro, your water bill… that kind of thing,” he says.
But unless your expenses eat your entire income (which isn’t likely, especially if it’s just a side hustle), you’re going to owe for what you’ve earned and if you don’t have the funds on hand, the Canada Revenue Agency is going to come for their money, says Jeff Glasner a taxation lawyer and shareholder with Boughton Law.
“It’s important they get their head around (their tax responsibilities) at the beginning of the year so they have enough left at the end of the year or into the next year when they file their taxes,” he says. “The CRA has a lot of powers to come after people who don’t pay their tax debts – they can garnish your bank accounts, your paycheques, put liens on your property, send bailiffs in against your assets.”
Paying the tax man
If you are in the position where you owe, Glasner recommends getting in touch with the CRA when you file since interest begins accumulating as soon as the amount is identified as outstanding.
“If you can’t pay it all up front then you try to work out a payment arrangement,” he says. “You’re not going to be able to negotiate the amount down but you may be able to stretch it out over time with regularly monthly payments either electronically or perhaps by post-dated cheques.”
In cases where there’s a balance outstanding and they need to work out a payment plan, don’t be surprised if the following year the CRA asks you to pay your taxes ahead of time in installments.
“Effectively that’s what happens to employees,” adds Davis.
He points out that gig-economy freelancers or space sharers who’ve grown their income beyond $30,000 will also have to collect and pay HST. The CRA has, at times, shown a tendency to more aggressively pursue outstanding GST so once you start collecting it’s good to slide this into a side account.
One way to protect yourself once your business has grown and you’re earning more than you need to live, is to incorporate.
“A corporation can provide some nice tax benefits – typically on the first $500,000 of income (the tax rate) at the national average is 15 per cent,” says Davis.
And it also offers some protection to separate yourself personally from your business as an entity if that business owes taxes. Glasner notes that it is within the CRA’s powers to come after you if you have taken money or another asset out of the company that you weren’t necessarily owed.
“The CRA can issue an assessment against you the human being for the corporation’s income tax debt to the lesser of what the corporation owed or owes and the excess amount you took out of the corporation,” says Glasner.
Davis says the reality is, the gig economy is new and not everyone is thinking about taxes when the money comes irregularly or in and amongst a regular salary.
“But as the income grows and becomes more consistent you’re certainly going to want to make sure you make those provisions for income,” he says.