It’s been a rough year of lay-offs and downsizing for a lot of Canadians. As the labour market imploded and shed jobs, many former employees who found themselves out on the street decided to manage the situation by going into business for themselves.
Even if the arrangement only lasted for a few months, those who did move into self-employment this year, particularly those who made money, have a few things to put in place or consider before tax season. (It’s not that far away.)
H&R Block Canada’s senior tax analyst, Cleo Hamel and CIBC’s Jamie Golombek, managing director of tax and estate planning at the bank’s private wealth management division, say there are several things a newly or suddenly self-employed person should do when starting out.
• Keep clear records: A number of expenses can be claimed to offset income and reduce taxes at the end of the year, but many can be lost or the details forgotten if simply kept in a shoebox filing system. As well, keeping track of income earned is vitally important to avoid any unpleasant surprises, given that income tax is no longer being deducted ahead of time.
• Track all sources of income: Not only will it be necessary to pay the income tax bill employers once made deductions to cover, severance packages can push people into higher tax brackets, which in turn allows the CRA to demand a much larger chunk of any additional income earned. At the same time, those who’ve received Employment Insurance payments at any point during the year could owe money — Hamel says EI generally only withholds 10 per cent for tax purposes, even though federal tax rates start at 15 per cent.
• Open a separate bank account for tax liabilities: In addition to income taxes, those with self-employment income exceeding $30,000 a year will need to collect and remit GST to the government on a quarterly basis. “Cash flow can be an issue,” she says. “You need to make sure the money is there and ready to go if you have obligations.” A separate payroll account may also be needed if there are plans in place to hire staff for the business.
• Get professional help: “It doesn’t hurt to sit down with a qualified accountant who specializes in small business to discuss general tax planning, severance, withholding tax or the need to pay,” says Golombek. He adds that CanadaBusiness.ca is a good website for general information. “There are a lot of great resources available for business owners.”