Self-employed tax returns in BC

What is included

• The T1 return and the T2125 business statement, e-filed together.
• Deductions reviewed properly — home office, vehicle, supplies, and the ones commonly claimed wrongly.
• Capital cost allowance where equipment or a vehicle is owned rather than expensed.
• Instalment calculations, so next year does not arrive as one bill.
• GST/HST cross-checked against the business income reported.
• A view on incorporating, where the numbers are starting to suggest it.

When it is worth incorporating

Incorporating is rarely wrong in principle and often wrong in timing. The triggers are usually profit consistently above what the household needs, a contract or a hire that changes the risk, or an asset purchase ahead. Sole proprietor to incorporation works through when, and the calculator puts numbers on it.

What the T2125 asks for, and what to keep

A self-employed return is a T1 with a business statement inside it: Form T2125, Statement of Business or Professional Activities. It is where most of the tax on self-employment is decided, and where most review letters start.

Three things follow from the T2125 that a first-year sole proprietor rarely sees coming. CPP is paid on both halves — the employee and employer share — on net self-employment income. GST/HST registration becomes mandatory once taxable sales pass $30,000 in four consecutive calendar quarters, and brings its own GST/HST return. And once the balance owing passes $3,000 in the current year and either of the two before it, the CRA asks for quarterly instalments, due March 15, June 15, September 15 and December 15.

The filing deadline is June 15; the balance is due April 30. A self-employed T1 with schedules is commonly $250–$450 per return, quoted in writing before any work begins — see pricing.

Records to keep, and for how long

The CRA can ask for the records behind a self-employed return for six years from the end of the tax year they relate to, and a review letter usually gives 30 days to produce them. Three habits make that painless:

• A separate bank account and card for the business. It is not required for a sole proprietor, but it turns the T2125 into a reconciliation instead of a reconstruction.
• A vehicle log kept as you go — date, destination, purpose and kilometres. A log rebuilt at year-end is the first thing a reviewer questions.
• Receipts photographed when they arrive. Thermal paper fades within a year; the image does not.

If sales are growing toward $30,000, keep an eye on the four-quarter total: registration for GST/HST is then required, and from the date you are required to be registered, GST/HST is owed on your taxable sales whether or not you charged it.

The home office rule most first-year returns miss

Business-use-of-home expenses cannot create or increase a business loss. In a slow first year, the part that cannot be used is not lost: it carries forward and is deducted in a later year when the business has income to absorb it. The workspace must be either your principal place of business, or used only for the business and regularly to meet clients.

Who this is for, and who it is not

A good fit: a sole proprietor, contractor or freelancer with business income to report, including someone running a side business alongside employment, or anyone weighing a partnership instead.

Not a fit: an owner whose profit has been consistently above what the household draws for a couple of years — that is usually a signal to look at incorporating first. In either case we say so on the first call rather than quoting for work you do not need.