Started a side hustle in 2020? Newly self-employed? Here’s what you can claim to reduce your taxes

When the pandemic hit, Shakithyan Puvithasan had what many would call a “normal” job, working 9 to 5 at a telecommunications company.

He was luckier than many, and was able to keep working despite the pandemic’s devastating effect on the economy. But many of his family and friends weren’t as lucky, and seeing people losing previously steady incomes made Puvithasan realize he wanted a change.

For a while, Puvithasan, 26, had wanted to become self-employed. He wanted to have control over his own hours and to feel secure knowing he couldn’t be laid off during tough economic times.

So in the middle of last year, he finally made the leap.

Now, Puvithasan works full-time through multiple gig economy apps, supplementing his income from car-sharing company Turo by delivering food and groceries for Uber and Instacart.

“I would say the pandemic and people losing their jobs just kind of opened my eyes,” he said, adding that while he knows he made a risky decision, he’s glad he did it.

“I know I was literally going against all the odds.”

He’s not alone.

According to a survey in January for Turo by Angus Reid, 14 per cent of Canadians have started a side hustle since the pandemic started, and more plan to do so in 2021. Many did so because they have more spare time, because their employer cut their hours, or because they lost their job entirely.

Many of those newly self-employed people are likely working in the gig economy, for companies such as Uber, Skip the Dishes, Turo or Fiverr.

According to a survey by Angus Reid for H&R Block, 25 per cent of current gig economy workers joined for the first time in 2020. More than half of respondents will be filing their taxes as self-employed for the first time.

If you became self-employed for the first time in 2020, tax season is going to be a bit more complicated than before. Here are some tips from tax experts to help you through the process. And if you’re relying on an accountant to do your taxes, a lot of this advice still applies.

What does being self-employed mean for my tax return?

There’s no threshold for when you have to claim self-employed income, said Gerry Vittoratos, a tax specialist with UFile — no matter how little you made in 2020 from your side hustle, you need to claim it using the T2125 form.

However, there is one threshold you need to watch for, said Vittoratos: if you’ve made at least $30,000 in one tax year, you have to start charging sales tax and remitting that to the government at tax time.

If you’re working through an app that charges sales tax automatically, it’s your responsibility to calculate the tax and remit it, with some exceptions (more on that later).

Vittoratos said it’s important to track your expenses, using technology wherever possible so that you’re not rifling through paper receipts when tax time comes. It’s also a good idea to have a separate bank account for your business, he said, to reduce confusion and keep a clear picture of your financials.

H&R Block tax expert Lisa Gittens said although you won’t be sending your receipts to the Canada Revenue Agency with your tax return, you need to keep your records, as the CRA may ask for them later on — up to six years after the tax year you filed for.

Jennifer Lucier, a tax partner with BDO Canada, said organization is of the utmost importance when you’re self-employed. For someone who’s only ever been an employee, tax season will be very different, she said, and it can induce anxiety.

Regardless of what you’re doing, “you’re essentially running a business,” Lucier said.

What if I’m a gig worker?

If you’re working in the gig economy, such as through Uber or Fiverr, you need to know whether the company charges taxes.

For example, Fiverr does not charge taxes to customers, while Uber does. Uber drivers are responsible for tracking how much tax they’ve collected and remitting it, unless they’re in Quebec, where Uber remits the tax to the government itself.

In that case, however, “drivers must still file GST and (Quebec sales tax) returns, and may be eligible for additional refunds or liable for additional remittances depending on individual circumstances,” according to an Uber spokesperson.

Most gig economy companies make it easy to track how much you’ve made, but the rest of the work is up to you.

What expenses can I claim?

There’s an overarching rule for claiming expenses, said Vittoratos: if it was incurred to help you make a profit, it’s likely an eligible expense. Of course, there are limitations.

For example, if you’re working from home, you can deduct your rent, home insurance, utilities and other costs, but you have to pro-rate them based on what portion of your home you’re using for work. If you’re using a shared space, like a kitchen, you also pro-rate based on the hours spent working there, said Vittoratos.

In order to be eligible to claim home office expenses, you must be working from home more than 50 per cent of the time, said Lucier, noting that if you own your home, you can’t claim mortgage payments — only the interest on those payments.

If you’re working out of your home office, don’t forget to claim smaller receipts for expenses such as pens and paper, said Gittens, adding that you can’t use a credit card statement to claim an expense: you need the actual receipt.

And if you incur a capital expense, such as a car or a computer, you don’t claim the whole expense right away, but rather a percentage of it each year, known as depreciation.

“The depreciable asset is a durable asset, something that you’re buying that’s going to last you,” said Vittoratos.

For many people starting their own business, the first year is filled with extra expenses, and you may not be making much profit — or any, said Vittoratos. And the government has a provision for that, he said.

“If you’re not making a profit yet, you’re creating what the government calls a non-capital loss,” he said. “Any business loss you incur in the year, you deduct it against your other income.”

If you’re making something, like soap or jewelry, you’ll want to claim your supply costs as expenses, said Lucier. You can also claim the costs of setting up a website and a portion of your cellphone bill, depending on how much of it was used for work.

If you’re using your car for work, you should be tracking all expenses related to your vehicle, from gas to maintenance, said Lucier, and pro-rating the expenses you claim based on what percentage of your mileage was business-related — so don’t forget to track that mileage, too.

“It sounds complex, but it’s relatively straightforward,” Lucier said. For example, if you found that 60 per cent of your mileage in 2020 was from driving for Uber, you’ll be claiming 60 per cent of your gas and other maintenance costs as business expenses.

If you’re driving for Uber, you can claim more than just car-related expenses, Gittens said. Are you stocking up on water bottles or gum for your passengers? Those count as expenses. Or if you’re delivering food, don’t forget to claim the thermal bag for the meals, she added.

What else can I do to prepare for tax season?

Lucier said the tax bill may come as a surprise for Canadians who are used to having taxes withheld from their paycheques. That’s why it’s a good idea to save a portion of your income in advance, so you’re not stuck with a bill you can’t pay, she said, noting that Canada Pension Plan payments will also be tacked on to your tax bill. Normally, the employee part of CPP is subtracted from your paycheque, and your employer pays the other portion — but if you’re self-employed, you’ll be paying both portions as part of your tax bill.

However, you can claim the employer portion of your CPP premium as a business expense, Lucier said.

Vittoratos added that after the first year, if your tax bill was above a certain amount, you’ll be asked to start paying it in three-month installments going forward.

He recommends reading the CRA’s business guide, which explains which expenses you can claim, and how.

“It’s very straightforward language, and they’ll go through the whole process,” he said.

Vittoratos’s last piece of advice for first-time self-employed tax filers is to not take on unnecessary expenses, assuming you’ll get a tax break.

He also noted that you have to be reasonable with your expenses — for example, if you buy or lease a car to drive for Uber or Skip the Dishes, don’t opt for a high-end model, as the government has a cap on how much you can claim.