The Three “R”s of Taxes
1.Records. One must keep good records. Some like to keep receipts by month, some like to keep receipts by project ,others by supplier or client. It is up to you, but should be kept neatly. They are evidence that supports your financial statement assertions.
Receipts could also be electronic, but one must back them up periodically. By back up, that means burn the file on a CD (separate from a computer that could crash), or on a RAID system (series of hard drives with redundant copies), or in the Cloud.
Contracts should have a paper copy.
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2.Reasonable Expectation of Profit (REOP). In principle, you can deduct something you paid for if it is business-related. Do you have a reasonable chance of profit by spending the money? How likely is that? Throwing a party for people and hoping to get business is not reasonable. Sitting down for a coffee with a prospective client to discuss business is reasonable. If there is supporting emails such as ‘let’s meet to discuss the contract’ so much the better as it provides evidence in case of audit.
If you upgrade your home office, fine. If you upgrade your home office and your kitchen and try to deduct both, that is unreasonable. Clients are hiring you for your services, not your cooking. Unless your business is catering, of course.
3.Residency. Residency is often overlooked. If one is a resident of Canada, one will pay income tax in Canada on worldwide income. If you make a good investment overseas, you are responsible for reporting the income from the investment.
Residency is also hard to lose. One must cut most ties to Canada to avoid paying taxes as a Canadian resident. For example, if you go and work for a year overseas, but still own property and have other ties to Canada, you are considered a resident of Canada.