| Claiming Business Income And Expenses | | | | under CCA's Class 8, "Other Property". Class 8 has a |
| All business income and expenses are claimed on a | | | | rate of 20%. |
| T2125 form. You enter your income into "Part 1 - | | | | - First Year $250 (half of $500) x 20% = $50 |
| Business Income". Since you just enter one number for | | | | expense claim. This leaves a value of $450 next year. |
| the entire year, you should be keeping track of your | | | | - Second Year $450 x 20% = $90 expense claim. |
| income received with QuickBooks or Microsoft Excel. | | | | This leaves a value of $360 next year. |
| If you are selling goods, you will need to enter your | | | | - Third Year $360 x 20% = $72 expense claim. This |
| opening inventory for the year and any purchases of | | | | leaves a value of $288 next year. |
| those goods you made throughout the year. These | | | | - You continue depreciating the desk this way until you |
| numbers are entered into "Part 4 - Cost Of Goods | | | | are at $0 These calculations are done in Area A and |
| Sold And Gross Profit". If you are selling a service or | | | | Area B on page 4 of the T2125 form. For a home |
| make advertising income, you do not need to complete | | | | business, the following four classes would likely be of |
| this section. The next section, "Part 5 - Net Income | | | | the most interest to you: |
| (Loss) Before Adjustments", is where you enter your | | | | - Computer equipment and systems software Class |
| business related expenses. What expenses can be | | | | 50 (55%) (100% from Jan 27, 2009 to Jan 31, 2011 - |
| claimed? The CRA says "certain costs that are | | | | half year rule does not apply) |
| reasonable for a particular type of business, and that | | | | - Data Network Equipment - Class 46 (30%) |
| are incurred for the purposes of earning income. | | | | - Small tools ($500 limit) - Class 12 (100%) |
| Business expenses can be deducted for tax purposes. | | | | - Other Property (furniture, appliances, fixtures, |
| Personal, living, or other expenses not related to the | | | | machinery, and equipment) - Class 8 (20%) As the |
| business cannot be deducted for tax purposes." You | | | | claimable part is calculated with expenses, this is |
| can only claim the portion of the expense that is used | | | | another case where you can claim expenses that |
| for business. For example, if half of your internet use is | | | | exceed your business income. Business-Use-Of-Home |
| for business, then claim 50% of the ISP fee. Another | | | | Expenses If your home is your principal place of |
| rule from the CRA is that you can only claim 50% of | | | | business, you can claim Business-Use-Of-Home |
| the cost for meals and entertainment . These | | | | expenses on page 3 of the T2125 form. The |
| expenses could be almost anything, as long as the | | | | expenses allowed to be claimed include: |
| expense is incurred to earn income. Some of which | | | | - Heat |
| could include: | | | | - Home Insurance |
| - advertising | | | | - Electricity |
| - automobile | | | | - Maintenance (i.e. cleaning materials) |
| - bank charges | | | | - Mortgage Interest (interest only, not mortgage |
| - business taxes and licenses | | | | payment) |
| - conference and convention fees | | | | - Property Taxes |
| - interest | | | | - Water (if applicable to your business) The amount |
| - insurance | | | | you can claim is based on the square footage of the |
| - ISP fees | | | | area used for business use. For example, if your |
| - membership dues | | | | house is 1,500 sq ft and the office you work out of is |
| - meals and entertainment (50%) | | | | 150 sq ft, then you can claim 10% of the expenses |
| - office supplies | | | | above if you use this room solely for business |
| - postage and courier | | | | activities. If you also use the room for personal use, |
| - salaries of employees | | | | you also have to calculate the fraction of time that it is |
| - telephone | | | | used for business use. For example, if you do 4 hours |
| - travel The tax advantage here is that while you do | | | | of work a day, 5 days a week, then you have to take |
| claim your income and are taxed on that, you get to | | | | 20 hours (4 x 5) divided by 168 hours (24 x 7). In this |
| claim these expenses against your total income, not | | | | example, that's 11.9%. That would be multiplied by the |
| just business income. For example, if your marginal tax | | | | square footage calculation and you would only be able |
| rate is 32% and you business income is $1,000, then | | | | to claim 1.19% of the above expenses. Obviously, you |
| you will pay an extra $320 of tax. But what if your | | | | would be better off if you use the room only for |
| deductible expenses came to $1,500 that year? Then | | | | business activities. Unlike the business expenses and |
| you would have tax deduction worth $480. So in this | | | | Capital Cost Allowance we've discussed, |
| example, you'll actually get $160 back on your tax | | | | Business-Use-Of-Home expenses can only be applied |
| return. Capital Cost Allowance (CCA) Now we've | | | | against a net income and cannot create a net loss. For |
| discussed claiming business expenses. With those | | | | example, if you have $2,000 in business net income |
| expenses, you can claim the full amount in the year | | | | and $1,500 in Business-Use-Of-Home expenses then |
| the expense happened. While also part of the | | | | you can claim the full amount. If you have a net loss |
| expenses used to calculate net income (or loss), some | | | | (income minus expenses), then you cannot claim the |
| items are subject to Capital Cost Allowance rules. | | | | Business-Use-Of-Home expenses that year. However, |
| Capital Cost Allowance is a set of rates stating the | | | | the dollar amount you calculated should still be entered |
| amount you can claim each year on a depreciable | | | | into the tax form as it can be carried forward to future |
| property used for business activities. In the first year, | | | | years. So once you are finally achieving a positive net |
| you can only claim based on half the amount paid. This | | | | income, you can claim the carried forward amount up |
| is in place since if you acquired the equipment during | | | | to the amount of your net income. If you still can't claim |
| the year, there is not a full year of depreciation. For | | | | it all, carry forward the remaining to the next year. |
| example, say you bought a desk for $500. This falls | | | | |