2020 is already half over — if we don’t review the past and look ahead now,
we’ll have to wait until next year again.
This tax season, our entire team has lost more hair than our dads
and stayed up later than our grandpas, but to celebrate that JKtax finally has its own WeChat group,
I still want to write a summary and focus on a few of the most popular tax topics
among real estate agents — such as “What exactly is the tax filing deadline?”.

Speaking of deadlines: last year, some editor posted a tax article online that caused a lot of confusion.
A bunch of people came asking me why the Canadian tax deadline had suddenly changed to April 15 —
had the CRA launched a new policy?
After I recovered from the shock, I realized that the editor had copied an American article:
April 15 is the U.S. personal tax deadline.

This shows how fragmented information on the internet can easily mislead people.
The bits of knowledge we get from various media always come with context.
You see a post that looks amazing, quickly save it, and then it dies in your bookmarks.
What we don’t realize is that what we saved is incomplete, lacking the surrounding conditions
and limitations mentioned in the full context.

Alright, let’s get to the point.

For self-employed tax filing, there is a general principle that applies:

If an expense is incurred for the purpose of earning business income,
and both the circumstances and the amount of the expense are reasonable,
it can be used to offset that business income.

Note: Tax law likes to first define a “general rule” and then list various “exceptions”.
Read the whole question, and always read the fine print in contracts —
the limitations and special conditions are usually hiding in those “exceptions”.

1. Keep Records, Keep Records, Keep Records

Many people have the good habit of keeping records.
We keep records because we care, because it’s important, because we don’t want to forget the path we’ve taken.
Sometimes we also keep “evidence” so we can prove a point later.

I keep records because I have a terrible memory.

If you know enough to back up your WeChat chat history,
why wouldn’t you carefully keep your important business records?
CRA auditors who have been around for years are very thorough:
every amount that comes in and goes out must be backed up by something real.

Self-employed individuals must keep business records such as:

• Sales invoices, purchase receipts, cash register slips, gas receipts,
  bank statements, credit card statements, contracts, IOUs, receipts,
  transfer records, collection emails/messages, online purchase e-receipts,
  signatures, thumbprints… In short, any number reported on the tax return
  that relates to your business must be supported by written evidence.
  Originals are best; if you don’t have them, keep copies.
  Even a handwritten receipt, a photo, a scanned image, or a screenshot of a conversation should be kept,
  because these are what you will rely on if the CRA audits you.

The tax law requires that these records be kept for six years for potential review.

For example, if I file my 2019 personal tax in April 2020,
I must keep all the tax documents and supporting evidence until at least December 31, 2026.
If you really insist on destroying them earlier, you can use
T137 – Request for Destruction of Books and Records to apply to the CRA.

Also, keep your personal and business records separate.
The reasons are obvious, so I won’t go into detail here.

2. Business Use of Motor Vehicle

Many self-employed people use a vehicle for business.
If the CRA audits you, they will definitely ask to see your business travel log or mileage log.
This is not the “black box” in your car that records driving footage.
CRA wants to know how many kilometers you drove for business,
what percentage of your total annual mileage that represents,
and whether your claimed auto expenses are reasonable based on that.

A proper mileage log should at least include:

• On January 1, record the car’s odometer reading – this is the starting point for the new year.
• For each trip: date, starting point, destination, business purpose (must be related to your business),
  and kilometers driven between the two points.
• Record the above every time you go out on business.
  Make it a habit, like putting on your seatbelt, and keep it up from January 1 to December 31.
• On December 31, record the car’s odometer reading again – this is the end point for the year.

Then:
Business kilometers / Total kilometers for the year = Business-use percentage.

Example:

David drove 40,000 km in 2019.
According to his mileage log, 30,000 km were for business.
30,000 / 40,000 = 75%.
This means David can claim 75% of his car expenses as business use.

Car expenses include:

• Gas / electricity (for EVs), insurance, licensing and registration, repairs and maintenance,
• Lease payments, or interest on financed vehicles,
• Parking, highway tolls (e.g., 407), and depreciation (capital cost allowance).

Lease cost deduction limit: $800 + HST per month.
For vehicles financed after 2017, the deductible car loan interest is limited to $300 per month.

For more details, see the separate article “Lease vs Buy a Car”.

If David’s total vehicle expenses for the year were $6,000,
he can deduct $6,000 × 75% = $4,500 as business-use auto expenses on his tax return.

3. Home Office – Business Use of Home

First, check whether you meet these basic conditions:

• You have a clearly defined area in your home used specifically for work, meeting clients, and doing business –
  a space used exclusively for business purposes (a room or rooms used for business and for no other purpose).
• This area is your principal place of business, where you primarily conduct your business activities.
• The area is used on a regular and continuous basis for running your business.
  For example, a massage therapist who sees five clients a day, five days a week at home,
  would likely meet this condition.
  But a real estate agent who only meets one or two clients a week at home to chat about the market likely does not.

If all of the above are satisfied, you can claim a portion of the following expenses,
based on the ratio of your home office area to the total area of the home:

• Electricity, heating, home insurance,
• Repairs and maintenance related to the home office area,
• Mortgage interest, and property tax.

Note: I did not list water. Clients usually just have a cup of tea and leave —
they don’t typically finish the meeting and then take a shower at your place.
However, if you run a child care business at home, water may be reasonable to claim
since children wash hands, eat, get changed, play with water, etc.

Also, business use of home can only reduce your business income down to zero,
it cannot create or increase a business loss.
Any unused portion can be carried forward to offset income from the same business in future years.

Example:

Nana runs a small beauty and skincare business in her basement.
In the first two years she operates at a loss.
Her calculated business use of home is $1,600, but she cannot use it because the business is already in a loss position.
In the third year, she finally earns $1,500 of profit.
The previously unused $1,600 can now be applied: $1,500 is used to reduce that year’s business income to zero,
leaving $100 still unused and available to carry forward.

In the fourth year, Nana changes her business and starts making handmade jewelry in the basement.
The remaining $100 of business use of home cannot be used to offset income from this new business
because it is no longer the same business.

Finally, when claiming business use of home, be careful with the proportion.
If the claimed business-use area is too large, or you structurally alter your home
to create an office, or you claim CCA (depreciation) on the home,
it may affect your principal residence exemption.
Don’t gain a little and lose a lot.

4. Gifts and Promotions

Small gifts, promotional items, and souvenirs given to clients or potential clients
for business purposes can be deductible as long as the circumstances and amounts are reasonable.

The CRA does not set strict limits on the number or dollar amount of gifts;
they simply need to be reasonable.
“Reasonable” is subjective, of course. A practical way to judge is to put yourself in the shoes of a CRA auditor:
given this type of business and the profit level, is this kind of gift appropriate?
Is the value justifiable? Does the gift have an obvious, hard-to-explain personal element?

In real life, I’ve received movie tickets from a dentist, wine from an insurance broker,
and small toys for my child from an RESP representative.
From both a practical and monetary perspective, those all seem reasonable.

However, in the last 20 years I’ve moved six times and never once received rosewood furniture, LV bags, linens,
Tiffany necklaces, or high-end underwear from a real estate agent.
If you’re thinking of that sort of thing, you might want to reconsider.

5. Travel Expenses

David flew to the U.S. in 2019 to attend a conference on “Orlando Vacation Home Sales”
with the goal of expanding into the international market and promoting a new Orlando project his brokerage represents.
The travel expenses related to this business purpose can be deducted.

David adds: the original reason for his trip was to visit his brother who’s studying in the U.S.
The property conference just happened to coincide, and his firm arranged for him to attend.
How should the expenses be handled?

If the primary purpose of the trip was personal, then the main travel costs are not deductible.
However, certain expenses directly related to attending the conference that are clearly business-related may be deductible.

David then asks: his spouse and children went along; how should their costs be treated?

Their travel is purely personal and not deductible.
If his spouse is also a licensed real estate agent, participates in the conference, and the purpose is to strengthen business,
her related expenses may be deductible. In that case, keep evidence of attendance
to support the business necessity of the trip.

6. Personal Items

Personal clothing and grooming expenses are considered personal, not business.
This includes suits, professional attire, tailoring, handbags, dry cleaning, cosmetic services, and hairdressing.
These are generally not deductible.

In Quebec, there are strict dress code requirements for female lawyers in court:
“the female attorney or female articled student shall wear a sober skirt or trousers with a blouse and jacket,
dress or tailor-made suit.”
Because of this, a lawyer named Thérèse Desgagné bought black suits specifically for court
and claimed them as business expenses, depreciating them over the years.
CRA denied the claim. Thérèse didn’t give up, took CRA to court, but the judge remarked that
although the clothing was black, she could still wear it “in general at work or elsewhere.
It is not very specialized clothing or a uniform.”
The court upheld CRA’s decision.

If even a lawyer’s “diamond shield” can fail in court,
the rest of us should definitely not try to pass off our everyday wardrobe as business expenses.

7. Tax Instalments

Because self-employed individuals don’t have an employer withholding tax at source
(or the withholdings are insufficient), they need to pay attention to whether they are required
to make tax instalments.

For both income tax and HST, if you meet the following two conditions, you must
pay quarterly instalments (on March 15, June 15, September 15, and December 15):

• Your net tax owing on your 2018 or 2019 return was more than $3,000; and
• You expect to owe more than $3,000 in tax for 2020 as well.

The CRA has an official worksheet.
Use the numbers from your 2019 Notice of Assessment to estimate whether you need to pay instalments in 2020.
If instalments are required but you don’t pay them, you may face penalties and interest.

For more details, see the separate article on “HST Instalment Interest Confusion”.

8. Important Dates

Remembering the following dates can greatly improve your peace of mind:

• Your spouse’s birthday + wedding anniversary + your children’s competition dates and graduation ceremonies
• February 29 – Last day to issue T4, T4A, T5… and contribute to RRSP for the prior year
• March 15 – Pay Instalment 1
• April 30 – Personal tax filing deadline and personal tax payment deadline (extended in some pandemic years)
• June 15 – Filing deadline for self-employed individuals and their spouses; also Instalment 2 due
• September 15 – Instalment 3 due
• December 15 – Instalment 4 due
• December 31 – Review the year, organize and categorize receipts at home, and go find yourself a good accountant