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Maximizing Tax Deductions for the Self-Employed

Victoria Morrison
Reviewing some calculations before filing taxes

Are you a self-employed person in Canada? If you are, then you'll have to figure out your taxes. But there's good news - Canada offers a number of self-employment tax deductions, no matter what type of activity your self-employment involves.  Whether it's a side gig baking cakes to earn extra cash or working full-time as a freelancer, if you make money from your business activities, you could be eligible for these tax deductions, too. And if you find enough deductions, you may even receive a refund.  Read on to learn more.

Your business structure matters

Self-employed people can choose a variety of business structures when filing tax forms for their business revenue, from sole proprietorships to partnerships to a corporation. Depending on how your business is structured, you'll have to file different tax forms. Here are the most common business structures for self-employed people who run their own business:

  • Sole proprietor (essentially filing as an individual)
  • Single- or multi-member partnership
  • Limited liability corporation or limited liability partnership (LLC or LLP)
  • Corporation.

Each structure has its advantages and disadvantages regarding how you're taxed and the types of deductions you can take - and thus the size of the refund you may be eligible for. Sole proprietors generally pay tax on their business income as individuals, filing a form T1 form. The filing process is a bit more complicated for people who have incorporated their business, but the tax advantages may be considerable, too.

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What tax breaks are available?

Self-employed persons can take advantage of a myriad of tax breaks, depending on the structure of their business. Whether you run a small business or work as a freelancer, you may be eligible for some or all of the following partial list of tax deductions:

  • Private health services plan premiums
  • Meals and entertainment
  • Use of a business vehicle
  • Office space in a private home.

Keeping records is more complex when you're your own boss

One of the most troublesome aspects of being self-employed is keeping track of all your revenue and expenses. Unlike a salaried employee, you won't receive a T4 income slip stating all your income and tax deductions each year.  Instead, you'll need to make sure you have records showing where all your revenue has come from and what your expenses have been. Things can get messy quickly. Thankfully, there are a plenty of useful tools to help you keep records and prepare your taxes.

But the benefits can be rewarding

The first step towards ensuring you receive the maximum deductions you're entitled to - and maybe even a refund if you've overpaid - is to keep detailed records of all your income and expenses. If can't back up a claimed deduction, you risk having it rejected by the Canada Revenue Authority (CRA).  Don't just throw your receipts in a box and forget about them until the week before you have to file. Write detailed notes on all of your receipts so you can explain them later on if necessary. For example, if you have lunch with a prospective client, write a brief note on the receipt if you pick up the tax indicating:

  • The name of the person (or people) you met with
  • His or her company
  • A brief description of the business topics discussed.

Doing this as you go will save you a lot of sweat later on. Using a tool like Mile IQ, for example, to keep track of how many miles you've driven for business trips is another smart option for the self-employed. The potential savings will more than make up any upfront costs.

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