Self-Employment Revisited(top of the page)

If you are self-employed, save all your receipts and, most importantly, set aside a portion of your earnings for the payment of your personal income taxes.

Certain rules apply to self-employed individuals. Independent contractors and freelancers are entitled to claim certain deductions that ordinary employees are not.

An independent contractor or freelancer can usually claim expenses for home/office, stationery, telephone, automobile, salary to an assistant, promotion, office supplies and other related expenses.

If you file your tax return as an independent contractor or freelancer, make sure you follow Canada Custom and Revenue Agency’s guidelines. Ask yourself: “Is the nature of my relationship with a client or a customer that of an independent contractor! freelancer or is it that of an employee?” The tests are as follows:

Am I servicing more than one client during the year? Am I providing my own tools of my trade and other equipment necessary to carry on business? Do I determine my hours of work and the authority to discipline and control the work environment? Am I corresponding with clients using my own stationery and having my own office and telephone? Do I have the risk of loss or chance of profit from my business endeavour?

If the answer is no to any of the above, you run the risk of being classified as an employee.

If you have improperly characterized this relationship, you could be subject to an increased tax liability as Canada Customs and Revenue Agency would then classify you as an employee and not self-employed and would disallow your claim for expenses for the years under review. Not only would this add to your tax liability but may be subject to interest and in some cases, penalties.

As a self-employed individual you must collect and pay G.S.T. if your revenue exceeds $30,000 per annum. In addition, you may be subject to withholding tax deduction at source on wages if you employ an assistant.

Renting Out Your Home (top of the page)

If you own a home and rent out a portion of it, you could deduct from your gross rental income a pro-rata portion of related expenses such as property taxes, mortgage interest, insurance, repairs and maintenance. Please remember to keep all receipts and vouchers.

In certain cases, the annual deductions may exceed the annual income and the loss incurred could be used to offset your other income. However, you may have to demonstrate to Canada Customs and Revenue Agency that you have a reasonable expectation of making a profit from the rentals before they will allow this loss. The rent charged to the tenant must be fair market rent. This is important if you rent the house to a relative. The fair market rent can be ascertained by calling various real estate agents and comparing newspaper ads in your local area.

Deductions claimed for expenses must be pro-rated in the same proportion to the portion of the house that you have rented out. In the case of a vacancy due to an inability to rent the home, you could be asked to provide proof of advertising and to be able to demonstrate that you have made every effort to rent the space.

The deduction for mortgage interest is based on money borrowed to acquire the property and not as a result of credit tied to the equity in your home for personal use. You could arrange your affairs in such a way to enhance the deductibility of mortgage interest.

If you claim depreciation on your home, you will lose your “principal residence exemption”. As such, any subsequent sale of the property will give rise to a pro-rata taxable capital gain and recapture of depreciation previously claimed. In order to maintain the principal residence status of your home, you must not claim depreciation and ensure that the rental activities are incidental (i.e.: less than 50% of the home is rented out).

Write-off Capital Losses (top of the page)

2001 is not shaping up to be a great one for equity investors.

With markets on a steady decline for most of the year, the recent terrorist attack in the United States may not help matters. Investors who incur losses after selling their investments may be able to apply these losses against past and future capital gains, therefore receiving tax relief both in the near term and, depending on the relative amounts of prior year gains and current year losses, for years to come.

When you decide to sell your equities at a loss, you can deduct these losses against your capital gains realized in the same tax year. If after doing this, you still have a net loss, you can use your net capital loss to reduce your taxable capital gains in any of the preceding three years. If your capital losses exceed your past gains for these three tax years, they can be accumulated for use against future gains until they absorb all of these losses.

You have a capital loss when you sell or are considered to have sold a stock, bond or mutual fund for less than its adjusted cost base plus the expenses involved in selling the investment.

In carrying back your net capital loss, you can choose the year in which you intend to apply the loss and it does not have to follow a chronological order.

You could use estimated net capital losses to reduce quarterly installment payments immediately, rather than waiting to have these amounts used to recalculate the next year~s installments. This could, however, be potentially a risky proposition if your calculations are not accurate.

No one really likes to lose money on the market, but becoming familiar with the tax- planning opportunities available to taxpayers may help to soften some of these blows.

Ruling Opens Door to Mortgage Interest Deductibility (top of the page)

The Supreme Court of Canada has recently validated the use of a standard tax planning technique used by many taxpayers.

The technique involves selling income producing assets such as stocks, using the money to buy a personal asset, such as a home and then mortgaging the home to raise funds to repurchase the stocks. The basis of the plan is that, while interest paid on money borrowed to buy a home is not deductible, interest paid on money borrowed to buy stocks (or other income producing property) is deductible.

Taxpayers are entitled to structure their transactions in a manner that reduces taxes.

The Supreme Court’s decision is great news for taxpayers.

December 15th is a Key Date for Installment Payers (top of the page)

December 15th is one of four days for quarterly tax installment payments. The other dates are March 15th, June 15th and September 15th of each year.

In making installment payments, an individual can estimate what their tax bill will be for the year and make payments equal to one-quarter of that estimate. If your estimate turns out to be too low, interest and penalties will be charged.

Twice each year, the Canada Customs and Revenue Agency sends out installment notices of how much you might owe, based on your prior years tax liability. If you pay the amount requested, you will not be charged any interest even if it turns out the installments are insufficient to cover your actual tax liability.

Estimates made by the government are based on two separate tax years. In August, 2001, taxpayers who make installment payments received a notice which calls for four payments over the next four quarters: September 15th and December 15th, 2001 and March 15th and June 15th 2002 which are based on the 2000 tax liability.

The first two installments of any calendar year are based on tax liability from two years prior. The last two installment for a calendar year and the first two installments for the next calendar year are based on the last assessed year.

	2001 Taxation Year	2002 Taxation Year	2003 Taxation Year
March 15th	25% of total 1999 taxes	25% of total 2000 taxes	25% of total 2001 taxes
June 15th	25% of total 1999 taxes	25% of total 2000 taxes	25% of total 2001 taxes
September 15th	50% of : (total year 2000 taxes, less March and June installments paid)	50% of : (total year 2001 taxes, less March and June installments paid)	50% of : (total year 2002 taxes, less March and June installments paid)
December 15th	50% of : (total year 2000 taxes, less March and June installments paid)	50% of : (total year 2001 taxes, less March and June installments paid)	50% of : (total year 2002 taxes, less March and June installments paid)

Suppose you are confident that you will earn lower income in 2002 than your earnings in 2001. You can either use the government’s calculated amount, or alternatively, you can calculate a revised estimate of your tax liability, taking into account the fact that overall tax rates dropped for the 2002 tax year and your reduced income for 2002. The risk, if you choose this route and estimate your earnings incorrectly is that you will then have to pay interest and perhaps penalty charges. If you guessed right, you keep the cash.

Generally, the last installment of the year, which is due December 15th can be tailored more accurately to your 2001 financial situation.

Medical Expenses Expanded (top of the page)

To claim your medical expenses, add up your prescriptions and dental bills and insurance charges, and claim the portion that is more than 3% of your net income, or $1,642, whichever is less. However, you should be aware of other expenditures that could qualify as medical expenses (please remember to keep all receipts).

If you have a prolonged and severe mobility problem, you may be able to claim reasonable home renovations, if it allows you to enter or exit your house or to move around your house more efficiently. You can claim the incremental construction costs of building a new accessible home.

You could claim the cost of an air or water filter if you suffer from a severe and chronic respiratory ailment, you can claim the cost of a visual signalling device such as a visual fire alarm, if you are hard of hearing. You can also claim the cost of changing your driveway or walkway if it makes it easier for you to enter or leave your home.

You could claim the lower of $1,000, or 50% of the cost of an air conditioner, if it helps you to cope with a severe and chronic ailment or disorder.

If you receive medical treatment in the United States, or out of your municipality, you could claim travel and accommodation expenses.

Please remember to obtain a doctor’s certificate detailing the nature of your condition or ailment and the fact that he/she recommends the specific device.


NEWS OF THE FIRM: (top of the page)

We are pleased to announce that Ms. Anne M.L. Keong, CA has been appointed “Senior Manager” of the firm.

Saul Judelman is a father once again. His son, Shane now has a little sister, named Sarah born on August 25th, 2001.

Danny is a grandfather for the third time, his daughter, Sharon had a baby boy, named Ryan, on October 9th 2001. This is the first baby for David and Sharon Miller.

See previous issue

Fall 1999
Summer 2000
January 2001
Fall 2001
December 2003
February 2004
December 2004
December 2005
June 2006
December 2006
August 2007
December 2007