An Income Tax Guide For Self-Employed People Deductions - Guide

presents
Everything You Need To Know

About Expenses
An income tax guide for self-employed people
by
Sunny Widerman
© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

info@personaltaxadvisors.ca
Table of Contents
Introduction _________________________________________ 3
Is this booklet for you? _______________________________________ 3
What this booklet covers ______________________________________ 3
What this booklet does not cover ________________________________ 3
About the workbook __________________________________________ 3
Disclaimer _________________________________________________ 3
Feedback __________________________________________________ 3
Reporting expenses on your tax return ____________________ 4
First step: organize your receipts _______________________________ 4
The Gist of GST ______________________________________ 5
Do you need to include GST in your expenses? ____________________ 5
To exclude the GST from expenses and calculate the GST paid _______ 5
Using the workbook ___________________________________ 7
Adding another row to the spreadsheet___________________________ 7
What expense goes where ______________________________ 8
Look out for the 'exceptions and exclusions' symbol ________________ 8
Capital Expenses ____________________________________________ 8
Business-use-of-home expenses ________________________________ 8
Last check before you begin ___________________________________ 9
Government Expense Categories _______________________ 10
Conclusion _________________________________________ 14
If you still don't know where an expense goes ____________________ 14
A final note________________________________________________ 14
Who to contact for help ______________________________________ 14
About Sunny Widerman ______________________________ 15
and Personal Tax Advisors ____________________________ 15

Introduction
Is this booklet for you?
This booklet is for anyone who earns self-employment income and pays taxes in Canada, and is
designed to help them fill out the Expenses portion of the form T2125 Statement of Business or
Professional Activities in their tax returns.
The booklet is particularly aimed at people involved in the arts, because their needs and special
expenses aren't usually covered in the standard materials produced by the Canada Revenue
Agency (CRA). It is not for incorporated individuals.
What this booklet covers

By the time you have used this booklet and completed the Expenses Workbook, you will have
totals to put into each of the expense categories given on the T2125, except for Motor Vehicle
Expenses, capital cost allowance (CCA) and Business-Use-of-Home.
What this booklet does not cover

This booklet does not cover CCA (Capital Cost Allowance), Motor Vehicle Leasing Costs, or the
GST return. Motor Vehicle Expenses and Business-Use-of-Home are reasonably self-explanatory
on the form, and Capital Cost Allowance would be a whole other book. It also does not cover Part
4 of the T2125 form, Cost of Goods Sold. This section refers to inventory, and is for individuals
whose main business is selling a product.
About the workbook

You should have received a workbook along with this booklet, either in electronic or in print form.
The electronic version is an Excel spreadsheet that calculates totals for each category. Be sure
when using the workbook that you include or exclude the GST as necessary (see The Gist of
GST, later in this booklet).
If you do not have the workbook, you can request one by sending an email to
info@personaltaxadvisors.ca.
Disclaimer
Personal Tax Advisors has made every effort to ensure that the information contained in this
booklet is accurate according to Canadian tax laws as of January 2009. We cannot be held liable
for inaccuracies in tax returns filed using this information, or for changes in tax law that may occur
in the future.
This book is a guideline only, and does not replace the advice of a qualified tax preparer or
advisor. When in doubt, consult your Tax Advisor.
Feedback
This guide is designed to be easy to use, easy to understand, and reasonably fun to read. We
appreciate any feedback on how to make it better. Please send your comments, questions and
suggestions to feedback@personaltaxadvisors.ca .

Reporting expenses on your tax return
This portion of the booklet outlines the various expense categories included in Part 5 of the
government form T2125 Statement of Business or Professional Activities, which self-employed
people must complete.
CRA materials are generalized for people with more common businesses like doctors and
limousine drivers, and often don't include types of expenses unique to professionals who work in
the arts.
Part of the purpose of this booklet is to T2125 Statement of Professional Activities

provide guidance as to how those This booklet covers the highlighted part of this form.
unique expenses can be included in the
Statement of Business or Professional
Activities.
First step: organize your

receipts
The first step in preparing your
expenses it organize your receipts into
your own personal categories. Later
we'll translate and group these personal
categories into government categories
so they can be easily listed in your tax
return.
Every business has its own set: a

singer might have CDs and a
performance wardrobe, while a painter
might have paints and smocks. None of
these categories show up on the
T2125, of course.
Figuring out how to turn personal

categories into government categories
is what this booklet is all about.

The Gist of GST
Before you start adding up your personal categories and filling out your workbook, you may need
to take out the GST from your expenses.
Do you need to include GST in your expenses?
If you are not registered to collect the GST include the GST in all
your expenses
If you are registered to collect the …on the quick method include the GST in all
GST and are… your expenses
…not on the quick exclude the GST from

method your expenses using
one of the charts below.
If you're not sure whether or not you're on the quick method

If you have a GST number and don't know what the quick method is, assume you're not on it.
When you registered for your GST number you were put on the long method by default; to be on
the quick method you have to ask for it.
If you're still not sure, call the Canada Revenue Agency's GST and self-employed department at
1-800-959-5525 and ask.
To exclude the GST from expenses and calculate the GST paid
The charts on the following page show the formulas you use to calculate the cost of an item
before GST, which you will need to fill out your Expense Workbook. They also show you how to
calculate how much GST you paid for that item, which you will need to complete your GST return
(not covered in this booklet).

Table 1: GST rate of 5%
For expenses incurred on or after January 1, 2008
Type of expense To calculate the cost GST paid
excluding GST
Item on which GST and [total price you paid] x 0.956 [total price you paid] x 0.044
Ontario PST are charged (e.g.,
office supplies)
Item on which GST is charged, [total price you paid] x 0.952 [total price you paid] x 0.048
but no PST (e.g., reference
books)

For expenses incurred on or after July 1, 2006 but before January 1, 2008
excluding GST
Item on which GST and [total price you paid] x 0.947 [total price you paid] x 0.052
office supplies)
books)

For expenses incurred before July 1, 2006

excluding GST
Item on which GST and ([total price you paid] x 0.939 [total price you paid] x 0.061
office supplies)
books)

Using the workbook
The workbook provides space to enter your expenses in each of the categories listed in the
CRA's form. All you need to do is enter the type of expense and the amount, and the workbook
will add up your totals automatically. Enter each amount in dollars and cents, without the dollar
sign.
Do not use dollar signs ($), letters, commas, or any punctuation (other than the decimal
point) in the 'amount' column, or the workbook won't add the numbers up properly. The
workbook will add dollar signs and thousands separators (commas) as necessary.
Example:
Advertising
Can include: ads, business cards, flyers, website maintenance, etc.
type amount
Business cards $60.00
Promotional pens $350.00
Yellow Pages ad $1,500.00
Total for this category: $ 410.00
Adding another row to the spreadsheet

If you need more space in a category,
you can another row to the
spreadsheet.
1. Right click (Mac users: hold

down the "a" key and click) on
one of the rows where you
have entered expenses.
2. Select 'Insert' from the menu.
3. A new, empty row will appear
above the one you selected.
When you type a dollar value
into the 'amount' column of the
new row, it will be added to the
total for the category.

What expense goes where
Now we're getting to the meat of the matter. Each Expense category on the government's T2125
Statement of Business or Professional Activities form is summarized in the next section, with tips
on what you can include there.
Look out for the 'exceptions and exclusions' symbol

Be sure to pay attention to this symbol: [. That symbol warns you that there are some important
exclusions coming up – things you might think you can include in a category, but which don't
belong there.
[Capital Expenses
Speaking of exclusions, this one applies to every category. Do not include capital expenses in
any of the categories outlined below. They're handled differently, with calculations you do on
page 3 of the T2125 Statement of Business or Professional Activities.
What is a Capital Expense?

A capital expense is money you spend on an item that provides lasting value, beyond the current
tax year. Non-capital items only have value for the current year.
To figure out if something is a capital expense, ask yourself: is it something that I use up, or that
expires regularly, or that has to be bought or renewed every year? If the answer to any of those
questions is 'yes', then it's not a capital expense.
Examples:
Item Is it a Capital Expense?

Computer Yes – you keep using it year after year.
No – once it's used, it's gone. Every year you
Postage stamp
have to buy more.
Hammer Yes – you keep using it year after year.
Professional
No – you have to renew it every year.
membership
Capital expenditures have special rules. To learn how to handle them, read the government guide
to the T2125 Statement of Business or Professional Activities, or consult your Tax Advisor.
[Business-use-of-home expenses
Business-use-of-home expenses are expenses paid for a portion of your home, if you use it as a
workspace. Some of those types of expenses – rent and property taxes, for example – seem to
have their own category on the first page of T2125 Statement of Business or Professional
Activities . However, those are reserved for workspaces outside the home.
Business-use-of-home expenses, just like motor vehicle expenses and capital expenses, are
handled on their own. This booklet doesn't explain these expenses, because the T2125
Statement of Business or Professional Activities and its guide are quite detailed and self-
explanatory.

Last check before you begin
Make sure you've completed the following steps before you move on:
1. Organize your receipts into your categories, separating out capital expenses
2. Add up each of your categories, making sure to include or exclude the GST as outlined in
the section The Gist of the GST
3. Take a deep breath
Okay, you're ready! Let's get started.

Government Expense Categories
Advertising ____________________________________________________ line 8521
There are many forms of advertising. Some common ones are:
• Business cards
• Brochures, posters, flyers
• Website hosting and domain names
• Listings in directories such as the Yellow Pages or Casting Workbook
Bad debts ______________________________________________________ line 8590

This is where you include amounts that you billed people and included as income, but ultimately
never got paid for.
Most people use the 'accrual method' for calculating their income and expenses. That means that
for tax purposes you record income when you bill someone, and expenses when you are billed –
even if you weren't paid on time, or if you waited to pay the other person.
What can happen is that you bill someone, include the amount of that bill in your tax return and
pay taxes on it, but later realize that they're never going to pay you. Since you never got the
income, you really shouldn't have to pay the income tax.
Bad Debts is where you get that tax back. By including here the money you billed for but were
never paid, you subtract the income from this year's return, thereby getting the tax back.
Business tax, fees, licenses, dues, memberships and subscriptions ______ line 8760
Include fees for all your professional memberships, registration of business name, etc. If you are
an actor, your ACTRA fees go here.
[ Do not include payments to medical plans here, even if they're required for your membership
(e.g., ACTRA Fraternal medical benefits); they are a medical expense. Consult your Tax Advisor
to learn more about where those go.
Delivery, freight and express _______________________________________line 9275

This category is for people who ship out a product. Enter the amounts you paid to send out your
product here.
[ This category is not for the usual postage or courier charges on letters or small packages you
sent out – those are Office Expenses (see below).
Fuel costs (except for motor vehicles) _______________________________line 9224

Like Delivery, freight and express (above), this category is for people who ship out a product.
[ Do not include the gas you put in a vehicle in order to get yourself from place to place. That is
a Motor Vehicle Expense (line 9281, below).

Insurance line 8690
Insurance you pay on things you own for your business (your computer or special wardrobe, for
example), or for products you ship out.
[ This category is not for house, apartment or contents insurance, even if you work at home.
Such so-called business-use-of-home expenses go in the Business-Use-of-Home category,
which is calculated on page 2 of the government's form T2125 Statement of Business or
Professional Activities.
Interest ______________________________________________________________ line 8710

This category includes interest on loans, lines of credit, and credit cards. Don't forget the credit
cards! If you're not sure how much was interest on business expenses and how much was
personal, you can go through your bills month by month or just figure out a percentage that
seems reasonable. You can also consult your Tax Advisor for help with figuring out a percentage.
Maintenance and repairs ______________________________________________ line 8960

This category if for maintenance and repairs for equipment or other items related to your
business. Do not include maintenance and repairs on your home in this category, even if you
work there. Such so-called business-use-of-home expenses are calculated on page 2 of the
government's T2125 Statement of Business or Professional Activities form.
Management and administration fees __________________________________ line 8871

This category includes agent's commissions and managers' fees. It also includes bank fees, but
only if you have a separate account for your business. If you manage your business money out of
your personal bank account, you shouldn't write off those bank fees as an expense.
Meals and entertainment (allowable part only) ___________________________ line 8523

This category is for meals and/or events you attended as part of a business or client meeting. As
of January 2007, you can write off only 50% of your business meals and entertainment (that's
what they mean by 'allowable part'). If you have to travel for your business, even if it's overnight,
the meals you have while away from home also go here, and are also only 50% deductible.
Remember, this category is only for meals and entertainment that were part of client or business
meetings. If you're a performer or a film or theatre critic and must therefore attend theatre or films
as part of your research, don't include those expenses here. Put them with your research
expenses under 'Other expenses' (line 9270, below) so that you write them off entirely.
Similarly, if you have some people working for you and you treat them to a meal as a thank you or
as a benefit of working for you, the cost of that meal doesn't go in this category. Put it in 'Salaries,
wages and benefits' (line 9060, below) instead so you can write the whole thing off.
Motor vehicle expenses (not including CCA) ____________________________ line 9281

This booklet and workbook doesn't cover Motor vehicle expenses, as the government's own form
is quite detailed and self-explanatory. See page 4 of T2125 Statement of Business or
Professional Activities.
Office expenses ______________________________________________________ line 8810

Use this category for office supplies, postage, courier, etc.

[ This category does not include calculators, computers or peripherals, furniture, which are
capital expenses (see Capital Expenses in the previous chapter).
Supplies _____________________________________________________________ line 8811

This category is for items you buy and use in the manufacture of the product that you sell. A
photographer could include frames and film in this category; a luthier could include wood and
strings.
[ This category does not include office supplies (see 'Office expenses', above), because they're
not physically incorporated into a product.
Legal, accounting and professional fees _______________________________ line 8860

This category is for lawyers', bookkeepers', accountants' and tax preparers' fees.
Property taxes _______________________________________________________ line 9180

Use this category only if you have a workspace that's not part of your home.
[ This category does not include taxes paid on your home, even if you work there. Such so-
called business-use-of-home expenses go in the Business-Use-of-Home category, which is
calculated on page 2 of the government's form T2125 Statement of Business or Professional
Activities.
Rent _________________________________________________________________ line 8910

In this case, 'rent' is only for workspaces or storage that is not part of your home. If you work from
home, you can write off a portion of your home rent; but not here.
[ This category does not include rent paid on your home, even if you work there. Such so-called
business-use-of-home expenses go in the Business-Use-of-Home category, which is calculated
on page 2 of the government's form T2125 Statement of Business or Professional Activities.
Salaries, wages and benefits (including employer's contributions) ________ line 9060
Use this category for amounts paid to someone else who helped you earn income, who isn't
covered under 'professional fees' above. Note that you can pay a spouse or a child if they do
necessary work for your business.
If you paid your employees or helpers with gifts and/or meals instead of (or in addition to) money,
include the cost of those here.
Remember, it's to your tax advantage to include meals here rather than in Meals and
Entertainment, because in this category you get to write them off in their entirety. If you ate the
meal yourself, it must go in Meals and Entertainment. If your employee ate it, it can go here.
Travel _______________________________________________________________ line 9200

This category is for costs incurred while on business and/or professional development trips.
Includes plane/bus/train fare, accommodations, rental car & expenses, public transit while there.
It is supposed to be for out-of-town travel. Î But if you travel by public transit and taxis, you can
include those costs here since there's no better place to put them.
[ This category does not include meals you eat while travelling, even if you're gone overnight.
Those expenses must go in Meals and Entertainment, above.

Telephone and utilities ________________________________________________ line 9220
If you have a workspace that is not part of your home, you can include heat, electricity, local
phone and water for that workspace here. You can also include the business portion of your cell
phone, internet access, long distance phone, pager, and fax line here.
If your residential phone line is also your business line, include the business portion of the
expense, prorated by the amount of time you spend on business calls. For example, half the time
you spend on your residential phone line is for business purposes, you can deduct half the phone
bill.
Other expenses ______________________________________________________ line 9270

This is the dumping ground for every business expense that (a) doesn't fit anywhere else or (b)
you're not sure about. Some examples are: performance wardrobe, professional development
courses and seminars, conferences (maximum of two per year), and CDs, DVDs, theatre tickets
and books if they're legitimate research materials, and promotional gifts. Buying a bottle of
wine for your agent is an example of a promotional gift.
Private Medical Insurance: This is also where you deduct the cost of private health services
plan (PHSP) premiums. If you pay into a health plan for yourself, your spouse or common-law
partner, or any member of your household, AND if you earn at least 50% of your income through
your freelance business, you can deduct those premiums here (within proscribed limits). While
these expenses can also qualify as medical expenses, which can be claimed on a separate form,
it is usually preferable to deduct them here. This is because PHSP premiums provide a greater
tax deduction as business expenses than as medical expenses.

Conclusion
We hope this guide has been a help to you. We've done our best to make the government's rules
reasonably clear, and to cover the most common types of expenses our clients encounter. If you
have any more questions, contact us to arrange your own tax advisor to work with you, or refer to
the government's own site and materials.
If you still don't know where an expense goes

Sometimes categorizing your expenses is an art rather than a science, and there's room for a lot
of personal interpretation. For example, you might pay a web developer a fee to build and
maintain your promotional website. Is that payment an advertising expense (line 8521), a
professional fee (line 8861), or a salary (line 9060)? The answer: it's your call.
Many expenses have one definite place on the form, while others can be interpreted various
ways. Some won't fit anywhere, and just have to go into Other expenses (line 9270).
A final note
When calculating and categorizing your expenses for your taxes, try to be as logical as you can.
But don't get tied up in knots if you're not sure exactly where a particular expense goes.
With the exception of Motor vehicle expenses, meals and entertainment, and Business-use-of-
Home expenses, the precise placement of an expense doesn’t make any difference to your
bottom line; so long as no one number is particularly irregular or high, it's unlikely to attract
negative attention from the Canada Revenue Agency.
If you do get audited, your task is to convince the auditor that your expenses are 'reasonable'. So
long as you've been honest and feel you can confidently argue the reasonableness of your
expenses, go ahead and file your return without fear.
Who to contact for help
Personal Tax Advisors

phone: 416-361-3446
Canada Revenue Agency

Visit the Canada Revenue Agency at http://www.cra-arc.gc.ca/menu-e.html
For individual, non-business enquiries: 1-800-959-8281

Hours: Monday to Friday 8:15 am - 10:00 pm; 9:00 a.m. to 1:00 p.m. on weekends.
For self-employed, GST and business information: 1-800-959-5525

Hours: Monday to Friday 8:15 am - 10:00 pm; 9:00 a.m. to 1:00 p.m. on weekends.

About Sunny Widerman
and Personal Tax Advisors
Personal Tax Advisors offers tax preparation, advice, and planning strategies for individual
taxpayers, with a particular focus on the needs of self-employed or freelance clients. Sunny
Widerman has been preparing tax returns for clients since 2002, and offers knowledgeable
information and service in plain language and without judgement.
Call (416) 361-3446 or email sunny@personaltaxadvisors.ca to discuss your tax situation or

set up an appointment.


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presents

Everything You Need To Know

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

What this booklet covers

What this booklet does not cover

About the workbook

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Part of the purpose of this booklet is to T2125 Statement of Professional Activities

First step: organize your

Every business has its own set: a

Figuring out how to turn personal

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Do you need to include GST in your expenses?

…not on the quick exclude the GST from

If you're not sure whether or not you're on the quick method

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Table 2: GST rate of 6%

Table 1: GST rate of 7%

Type of expense To calculate the cost GST paid

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Total for this category: $ 410.00

Adding another row to the spreadsheet

1. Right click (Mac users: hold

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Look out for the 'exceptions and exclusions' symbol

What is a Capital Expense?

Item Is it a Capital Expense?

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Okay, you're ready! Let's get started.

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Bad debts ______________________________________________________ line 8590

Delivery, freight and express _______________________________________line 9275

Fuel costs (except for motor vehicles) _______________________________line 9224

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Interest ______________________________________________________________ line 8710

Maintenance and repairs ______________________________________________ line 8960

Management and administration fees __________________________________ line 8871

Meals and entertainment (allowable part only) ___________________________ line 8523

Motor vehicle expenses (not including CCA) ____________________________ line 9281

Office expenses ______________________________________________________ line 8810

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Supplies _____________________________________________________________ line 8811

Legal, accounting and professional fees _______________________________ line 8860

Property taxes _______________________________________________________ line 9180

Rent _________________________________________________________________ line 8910

Travel _______________________________________________________________ line 9200

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Other expenses ______________________________________________________ line 9270

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

If you still don't know where an expense goes

Who to contact for help

Personal Tax Advisors

Canada Revenue Agency

For individual, non-business enquiries: 1-800-959-8281

For self-employed, GST and business information: 1-800-959-5525

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

Call (416) 361-3446 or email sunny@personaltaxadvisors.ca to discuss your tax situation or

© 2009 Personal Tax Advisors.ca Need help? Contact us for an appointment!

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