Friday, April 3, 2015

Canadian Taxes A to Z (2015): E is for Employment Income

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

For most Canadians, the concept of what is, and is not, employment income may be the most fundamental tax concept of all. 

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. 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. 

The tax position of those earning employment income versus those who are self-employed, and the necessity of keeping detailed records of income and expenses,  is dramatically different. Employees are permitted to deduct very few expenses related to their employment (things like instruments for musicians or mileage if not-reimbursed by employer), whereas the self-employed are permitted to deduct almost all expenses of their business. Many perceive this 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. You need to be in a position of knowledge strength to take full advantage of all the deductions available to you, be you employee or self-employed. 

Most employees don't need an accountant to do their taxes for them (though it's never a bad idea), whereas most of the self-employed definitely need an accountant. Look for an accounting firm with a designation. Accountants in Canada are increasingly switching to a common CPA designation (from CA/CMA/CGA). Non-designated people might still do a good job on your taxes, but you'll need to be more selective as they might not carry insurance or be subject to professional regulation. 

Everyone, employee or self-employed, can benefit from good tax preparation software. For years now I've been using, which I love. It's cheap, they offer great support (I've emailed them esoteric questions 24 hours before tax deadline and receives an answer within the hour), and Mac and iPad versions are available (in addition to Windows). 

Read More on How a Tax Lawyer Could Help You

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