Canadian Taxes A to Z (2018): "E" is for Employment Income

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Today, E for for Employment Income. Five letters down, 21 to go!

WHY THE DIFFERENCE BETWEEN EMPLOYMENT & SELF-EMPLOYMENT IS SO FUNDAMENTAL

The concept of what is, and is not, "employment" income may be the most fundamental tax concept of all for most Canadians. When I was an employed lawyer I couldn't deduct much against my employment income, because my employer was supposed to be paying for all my expenses. Once I became self-employed, I could claim all sorts of deductions like home office use or computer purchase.

Confusing the employment income and self-employment income concepts can lead to great mischief at tax time. In a world of increasing "independent" contractors, you need to avoid the CRA coming after you claiming that you are in fact an employee not entitled to deductions, or that you're an employer with employees who isn't taking source deductions like you are supposed to be doing. 

The four principal factors examined by the CRA in determining employee versus self-employed status are:

  1. control;
  2. chance of profit/risk of loss;
  3. integration (with larger business unit);
  4. tool & equipment ownership and repair.

Many perceive this difference between employed and self-employed deductions to be unfair, but like a lot of things under the Income Tax Act the best that can be said is that's just the way it is.

Regardless of whether you are an employee or self-employed, you need to be working from a position of knowledge to take advantage of all the deductions that are available to you. 

SELF-EMPLOYMENT LOSSES CAN OFFSET EMPLOYMENT INCOME

An example of what you need to know is that sometimes being both employed and self-employed can work in your favour. Even if you only earn a small amount of self-employment income, you can usually apply any losses you incur in self-employment against employment earnings to reduce you overall net income.

There are technical rules around how great those losses can be, but what this practically means is that you may be better off reporting a few thousand dollars in side income, rather than just "forgetting" about it and hoping no one notices because it is so small.

DO I NEED AN ACCOUNTANT & WHAT IS AN ACCOUNTANT

Some employees may not need a designated accountant to do their taxes for them (though it's never a bad idea), whereas most of the self-employed definitely need a designated accountant.

Everyone should be very clear on the reality that the simple term "accountant" (without any initials attached at the end) does not imply any designation (unlike lawyer, where we prosecute you if you use the term without being properly qualified). You should look for an accounting firm with a designation, as those without designations may not carry any insurance and definitely aren't subject to professional regulation. Accountants in Canada are increasingly switching to a common CPA designation (from CA/CMA/CGA). 

AT LEAST USE GOOD TAX PREPARATION SOFTWARE

Everyone, employee or self-employed, can benefit from good tax preparation software. For years now I've been using http://www.taxfreeway.ca/, which I love. It's cheap, they offer great support (I've emailed them esoteric questions 24 hours before tax deadline and received an answer within the hour), and Mac and iPad versions are available (in addition to Windows). No, they aren't paying me to say that, they just deserve some appreciation. 

 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.