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Discussion Starter #1
Some years ago, I lived in Ontario as a self employed professional. I used T2125, billed clients and managed my own income & expenses including use of home expenses. The arrangement worked out well, and I'd happily do it again.

I'm wondering if there may be any significant tax differences between BC and ON with this work arrangement as I consider which province to move to.

When I use the tax estimator at SimpleTax's web site, inputting my expected self-employment income plus dividends & interest, both BC and ON give similar results, with slightly better results from BC (higher after tax income).

Taxes are just one consideration among cost of living and other factors. But is anyone aware of any significant differences between BC and ON for a self employed professional, for example differences in dealing with GST & HST, or ability to claim business-use-of-home expenses?
 

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I haven't lived in other provinces, but have been doing T2125 in Ontario for quite a few years. It's my understanding that all the rules around GST/HST, business expenses, etc are federal, not provincial. Obviously, GST/HST rates and specifically what they apply to will vary by province, but the overall rules about when you need to charge, remit, etc are federally regulated. Similarly, business expenses are noted on the CRA website without any provincial distinctions.

In Ontario, if you're low income your rent/property tax expenses can help you get the Trillium benefit. I don't know if they have something similar in BC. That's not really related to self-employment, but if you're going to do it part-time you might end up low income and qualify for some programs.
 

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Discussion Starter #3
Thanks Spudd, good points. Yes now that you mention it, I do remember getting a rent credit in times my business income was very low. I think MB and ON both do that, not sure about BC.
 

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Discussion Starter #5 (Edited)
I don't know if there's a better thread than this one, but does anyone know of any guidelines or rules of thumb for how to treat travel for mixed purposes (some business, some pleasure) for self employment expense accounting?

For example, I have some trips that are part leisure. It's partly to visit friends, see cities, etc. However at the same time I'm conducting business meetings, discussing potential projects which -- if they land -- would be T2125 self employment income. The purpose of the whole trip is partly for networking and business, but of course the two are commingled during the trip.

I don't want to get in the trouble with the CRA, but at least part of these trips are legitimately business expenses. The flights & hotels do add up, of course, and part of that money is being spent towards (potentially) earning more revenue. For example on an upcoming trip, 3 of 7 days will be entirely for discussions of potential contract work. However, there is no contract currently in place with them. I estimate 60% chance the discussions may lead to future revenue.

Should I be claiming any of the flights & hotels as a T2125 expense?
 

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https://business.financialpost.com/entrepreneur/0213-biz-cc-camilla
https://www.taxtips.ca/smallbusiness/businessexpenses.htm
https://www.thesimpledollar.com/how-to-write-off-some-or-all-of-your-vacation/
https://www.moneysense.ca/magazine-archive/the-taxman-loves-a-party/

From these links, it doesn't sound like the odds of getting business matters or having a contract (though it would help document it was partly a business trip).

The flights seem to be fine for the whole amount, hotel seems to need to be prorated and meals seem to be subject to a 50% rule.


Cheers
 

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I'd make sure to keep detailed notes about who was met with, what times, location, what the potential business or networking etc. I've usually found it easier to convince people that the expenses are legit when there's lots of info about it instead of vague, half remembered comments.


Cheers


PS
Some of the info you'll want to have anyway, in case of future calls or contacts.
 

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Discussion Starter #9
That's true, good point. Well I think this works out well. I booked two different hotels, one for the few days upon arrival (business) the next for personal stuff.

One of my contacts already set up a business meeting that's right after I arrive, so I have his email with time & location. This evidence supports the first hotel booking as 100% business. I think I would probably claim the flight + hotel#1 as business expenses (supported with his meeting email) and leave hotel#2 as personal time. If more of that time turns into business meetings as well, then I would keep emails as evidence of that.
 

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Discussion Starter #10
I'm having trouble understanding the relative timing of my revenue and expenses.

For my current work, I might invoice the customer in either December or January. So the revenue could arrive in 2019 or 2020. There was no self-employment income before this; I was an employee and had employment income earlier in 2019.

However, I've already started incurring expenses. There's the travel (already paid) and I might have to buy some capital equipment as well.

I'm trying to figure out if I should try delaying my expenses so that they occur mostly in 2020.

Let's say that it's 2020 by the time I invoice the customer. What happens if I incurred all these expenses in 2019? The income statement on T2125 would then show $0 revenue, and a bunch of expenses including equipment depreciation. The result would be a net business loss, negative income.

What then happens to that loss? Does it actually subtract from my other T1 General employment income, dividends, interest, etc? If so, that's quite nice and I shouldn't try to delay incurring the expenses.
 

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My guess (and I am not an accountant): You would carry forward the loss (so no taxes due this year) and then write it off the business revenue that comes next year. I don't think you can write it off employee income (T4).

If you have other business income (not related to this expense item), the CRA may take exception to you taking the deduction, depending on the circumstances (particularly if it is a large amount). Years ago I vaguely remember a case the CRA took to court regarding a dentist who was trying to start a farming side business (raising chickens or cows if I recall correctly). He took a loss and wrote it off his practice income. The CRA argued that his side business amounted to a hobby of sorts and the deduction should be disallowed. IIRC the court disagreed.
 

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Another concept (and I am not an accountant) is that there is 2 accounting methods: accrual and cash basis. In the accrual method, the revenue is not necessarily recognized when the payment is made, but usually earlier when the work is done or maybe when the order is taken. So in your case, if you do the work in 2019, you will recognize the revenue, along with the expenses in 2019, even though the customer pays in 2020.

In the cash method, revenue is recognized when cash is received. I believe corporations use the accrual method. I think the cash method is considered acceptable for non-incorporated businesses, but I might be mixing up USA and Canadian here, so you may want to check this one out.
 

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Discussion Starter #13
Even with the accrual method, I belive the convention is to recognize the revenue when I actually produce an invoice. The payment may come much later, but the invoice marks that "work has been done".
 

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I had always claimed income (as a freelancer) for the year in which I did the work - even if December invoice might not be delivered until 2 January. This past year I had a client issue a T4 for all the work done that year but which excluded December, presumably since that invoice was paid in January. I'd never before seen a T4 for billing as a consultant. I decided the most important thing was to be consistent with whatever CRA had on file so did not report that December income for the 2018 tax year, but will do it this coming year. (I guess I make a year's interest on the tax on one month's billings, so good deal - I'll go buy myself an extra large coffee with my profits).

For expenses that run over the the year-end, such as utility bills issued in January for readings made in December, I just use the date of the bill to figure out which tax year it belongs to. As long as you are consistent year after year it all comes out in the wash. This is all very amateur accounting but thus far no complaints so I can't be messing up too badly.
 

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... I think the cash method is considered acceptable for non-incorporated businesses, but I might be mixing up USA and Canadian here, so you may want to check this one out.
You may be mixing up the US system.

This link says that only three types get to choose between methods, specifically farmers, fishers and self-employed commission agents. All other self-employment income has to use the accrual method. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/accounting-methods.html


Even with the accrual method, I belive the convention is to recognize the revenue when I actually produce an invoice. The payment may come much later, but the invoice marks that "work has been done".
For the accrual method described in the link, there's no mention of an invoice, just reporting in the fiscal period it was earned - no matter when the payment shows up.

https://www.taxtips.ca/glossary/accrualbasisaccounting.htm


Cheers
 

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According to this article (which corresponds with my recollection, but I wanted to verify), you can write off your business expenses against your regular income.
 

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Discussion Starter #18
According to this article (which corresponds with my recollection, but I wanted to verify), you can write off your business expenses against your regular income.
Oh wow - thanks. It might be time for me to fire up the tax software and see the mechanics of how it handles this, but the article sounds encouraging.
 

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Possibly a bit of nit picking but what is being described is the high level net effect - not the mechanics. The mechanics is to use the form that includes both income and expenses to end up with income or a loss that is transferred to the main return.


Taking a quick look at T2125 "Statement of Business or Professional Activities", there is a section for income, part 4 for expenses and part 7 for business use of home expenses. Everything ends up rolled into the line 9946 "Net Income or Loss". What type of income, whether it's business, professional or commission changes what line number on the main return the net amount goes into.

Pretty much the same as real estate rentals where the income as well as expenses are on form T776 "Statement of Real Estate Rentals" to end up with a net amount, which is transferred to the main return.


IOW - the main potential issue is whether all eligible expenses were included, especially where tax software is automatically calculating as well as transferring the net amounts. There is really nothing to do for reported expenses resulting in a loss being applied to other income.



Cheers


PS
I doubt many use the paper forms but that would be the place for a lot more potential calculation errors or forgetting something.
 

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Discussion Starter #20
Yes, I see that the net result of T2125 goes to line 9946. This can be positive or negative (a loss). This gets transferred to the main T1 return, maybe line 137:
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/completing-form-t776-statement-real-estate-rentals/line-9946-your-net-income-loss.html

And yeah, same story as real estate rentals.

What I'm still not sure of, though, is whether line 137 permits a negative number. Or does the tax software block you from doing that? Taxtips seems to say the negative number is permitted:
https://www.taxtips.ca/filing/selfemploymentlosses.htm

If the negative number IS allowed at line 137, this means the business loss is being applied against all my other income (investments, employment, everything).

This is important for me because my 2019 income is pretty high, from all other sources. Being able to incur some business expenses immediately... such as travel & new equipment... could be quite nice if it directly subtracts from gross income.
 
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