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Discussion Starter · #1 ·
Hi everyone. First post on here.

I work in the music industry. Part of my work involves only offering services, not physical products, which makes taxes pretty easy for me since it's just my gross income and then a few gear related things to deduct.

I also build and sell some products and this is where I've gotten confused as to how to determine my income from it. One of the things I make are some high end cables which involves many layers. Each layer sort of contracts and extends as I feed it on so it's not a simple matter of 1m of cable = 1m of part. I'll order 300' of a part and then once I run out of it I order more. There's no way for me to keep track of exactly how much I use for each order.

How should I be determining my income for this? Do I create an estimate for each product I make (say a cable uses x amount of part y for each meter of cable I make and that amount of y costs $$) and then just add up this total hypothetical parts cost to deduct from my gross income? Or do I look at all of the money I spent over the year for parts and subtract that? Where that would get tricky is determining parts I already had and parts that I'm left with at the end of the year. Then there's also the question of R&D cost. If someone orders an item and I try out 10 different parts to find the best one, do I only subtract the cost of 1 part? Or would I subtract the cost of the 10 parts from my income (and hold on to the other 9)?

I've tried researching this and buying a few books about starting a small business but nothing has covered this. I'm not really sure what I should be searching for.
 

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I am not an expert but I feel confident in saying it doesn't matter how much you spend on each product. It will just be your annual expenses on parts in total that matters, as well as your revenue from sales.

Anything you have left over counts as inventory.
 

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As a business operator its nice to know what your cost/margin is on each sale, but CRA could care less.

They look at it on a yearly, high level view. As Spudd says, all your expenses in the year and all your combined income for the year. There is some areas you need to look at around the start/end of your tax year. Some income needs to be booked/accrued when it was invoiced rather than money received. Maybe for small businesses they don't care, just income and credit card statements/receipts.
 

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Discussion Starter · #4 ·
Thanks for the input. That makes sense.

Where that leaves me confused is how to prove what is and isn't related to my work. For example, I build speakers. I regularly go to Home Depot to buy things like MDF and paint. How would I prove that I'm not just using it for projects around the house (and then paying lower income tax as a result)?

What happens when I build a pair of speakers for my own use? Would I just call that inventory and deduct all of those expenses? I know that there are different laws for depreciable property but in this case I'm buying the raw parts and then making the goods myself. Seems like a grey area since I use the products I develop. Really I develop them for my own use and then end up selling them to anyone interested. So far I've never deducted what I invest into the R&D for my own gear but it seems like I could and then those parts just become inventory (even if I never sell them).
 

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Discussion Starter · #5 ·
The other area that confuses me particularly this year is with the covid benefits. Since it's in 2 week periods, it seems that I need ways to prove when exactly I made money and how much of a profit I made. That's why I was thinking that a "product sold" basis might be the way to go. I sold this on this day and this is my profit on the item. If they don't care about my cost/margin on each sale then how would they know that I really only made $10 instead of $500 on a $1000 item to determine my income in a given period? If all I'm tracking is a general input and output for the entire year then there's no way to see how much I made from each specific item.
 

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The other area that confuses me particularly this year is with the covid benefits. Since it's in 2 week periods, it seems that I need ways to prove when exactly I made money and how much of a profit I made. That's why I was thinking that a "product sold" basis might be the way to go. I sold this on this day and this is my profit on the item. If they don't care about my cost/margin on each sale then how would they know that I really only made $10 instead of $500 on a $1000 item to determine my income in a given period? If all I'm tracking is a general input and output for the entire year then there's no way to see how much I made from each specific item.
I don't understand this question. Did you get CERB and so you need to prove that you weren't making enough money during the periods you got CERB?
 

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Discussion Starter · #7 ·
I don't understand this question. Did you get CERB and so you need to prove that you weren't making enough money during the periods you got CERB?
Yes, CERB and CRB. I certainly qualified for it but I'm not sure how I'd prove how much I made in each period. I have dated invoices and you can easily see when I received money (etransfers, PayPal) but if they don't know my profit margins on each product, how would they know how much I made?
 

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The CERB info page says this about the income you're earning while receiving CERB (probably the same for CRB but you should double-check):
  • Owners who rely on business income should consider their net pre-tax income (gross income less expenses);
I think it should be sufficient to look at a whole year, figure out what percentage of your gross income was expenses, and then use that percentage against each period where you are making sure if you were eligible for CERB/CRB.

Example, you earned 100k and spent 50k over the year. That means 50% of your gross was expenses, so for each period, you would divide your income by 2 to get your eligibility income. Make sense?

As long as you have a reasonable and consistent way of doing it I think it will be fine. They don't spell out the exact details on the webpage so I don't think they have a specific method they want people to use.
 

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Discussion Starter · #9 ·
The CERB info page says this about the income you're earning while receiving CERB (probably the same for CRB but you should double-check):
  • Owners who rely on business income should consider their net pre-tax income (gross income less expenses);
I think it should be sufficient to look at a whole year, figure out what percentage of your gross income was expenses, and then use that percentage against each period where you are making sure if you were eligible for CERB/CRB.

Example, you earned 100k and spent 50k over the year. That means 50% of your gross was expenses, so for each period, you would divide your income by 2 to get your eligibility income. Make sense?

As long as you have a reasonable and consistent way of doing it I think it will be fine. They don't spell out the exact details on the webpage so I don't think they have a specific method they want people to use.
It's easy enough for me to determine my annual income from last year and divide that by half for each period to determine the most income I can have for each 2 week period of CRB. I've been appyling/not applying based on if my net income in each period is less than that which seems to be what I should be doing but that requires knowing my profit margins for each product I sell in each period. I'm not sure how I'd be able to prove that if anyone questioned it. How do they know that I actually put all of these parts into this product?

For my service based income then it's easy enough to prove that I made more or less than my qualifying amount. As soon as I sell a product then it seems to get tricky for this.
 
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