Whether it’s driving an Uber between shifts, selling the product of your hobby on Etsy or renting out the apartment in your basement as an AirBNB, more and more Canadians are opting for on-the-side jobs, becoming members of Canada’s ever growing “Gig Economy”.
The number of Canadians working on the side has more than doubled in the last 40 years according to Statistics Canada, and research conducted by Intuit Canada predicts that by 2020, 45% of Canada’s work force will be generating self-employed income under a “Gig Economy”.
What’s a “Gig Economy”? It describes a growing workforce made up of people earning a living through “gigs” like freelancing work or short term contract jobs. Drivers of the Gig Economy are the brave many who choose to ‘be their own boss’.
As a Licensed Insolvency Trustee, I’ve listened to many self-employed individuals talk about the financial struggle of dealing with insurmountable tax debt. In many cases, the tax debt was so overwhelming that the only option was to file a personal bankruptcy. The importance of being diligent with filing your income tax returns and making your remittances to Canada Revenue Agency on time is undeniably real and can save you the cost of penalties, interest and sleepness nights.
STAY ON TOP OF THINGS BY:
Having a proper record keeping system in place.
- The moment you start working for yourself is the moment you have to start maintaining proper books and records. Not only will this help you at tax time, but in preparation of a audit from CRA, you’re expected to keep all of your paperwork for at least six years.
- Keep a record of your income/revenue and expenses. What’s crucial is the day-to-day recording of transactions impacting your business. There are all sorts of methods available that will help you do this like using software or a spreadsheet. There are also apps you can have on your phone like Expensify or Freshbooks which helps you capture expense receipts, mileage, send invoices, etc.
Filing your taxes on time.
- As we know, April 30th is the deadline for us as taxpayers to file our income tax returns. Self-employed people have a deadline of June 15th; however, CRA begins charging interest on taxes owing starting April 30th. It is important to pre-plan knowing you need to have your remittances paid by April 30th to avoid interest charges.
- Filing your return late triggers penalties. The moment you’re late, you’re hit with a 5% penalty of the balance owing, plus an additional 1% for every month the return is late. Over the year, this could add up to a maximum penalty of 17%.
- Familiarize yourself with CRA’s online portals called “My Account or My Business Account” where you can check on the status of your tax accounts (like your GST account), the remittances you’ve made and to stay on top of important due dates.
Knowing that the cash you receive from a job you complete isn’t disposable income you have available to spend as you wish.
- Although there are benefits of being self-employed, one of the pitfalls is overlooking the fact that your income is still subject to taxes which must be paid to CRA. A good routine is to set aside 20-25% of what you earn for taxes. Remember, even though your tax return must be filed by June 15th, you must pay what you owe to CRA by April 30th.
The accumulation of tax debt year over year has dire consequences. CRA has a number of powers and remedies to collect what you owe them and most often, there is no notice given to you.
HOW CAN CRA COLLECT TAX DEBT?
- You’ll be charged compounded daily interest on the balance. The fact that the debt keeps increasing should be enough motivation to pay it off as quickly as possible.
- You’ll lose your GST credits or future tax refunds. CRA can make use of a ‘statutory set-off’ by applying your credits and refunds to the tax debt.
- Your bank account funds can be seized. CRA can garnish without going to court and can serve notice on your bank or any party who owes you money.
- Your home can be affected. CRA can register your debt with the Federal Court of Canada and obtain a “Certificate” which can be enforced like a judgment order. This certificate can be registered against your property which means if you sell it, you might not see any equity since CRA will get paid first.
These are stressful situations to face but being proactive is key to ensuring you stay on the good side of CRA. Taking simple steps like hiring a good bookkeeper or accountant to help you stay compliant while you focus on the business is money worth spending. Be realistic about your skills and abilities when it comes the paperwork. It’s true that record keeping isn’t everyone’s strong suit, but CRA does not see this as an acceptable reason to to ignore tax filings and remittances.
When in doubt, seek help from a professional. If you’re unsure how to get started, seek help from a tax professional. If you’re struggling financially and worried about paying off your tax debt, speak to a Licensed Insolvency Trustee about your options before CRA takes action against you.
Learn more about Income Tax Debt.