Personal Income Tax for the Self-employed
Filing tax returns as self-employed offers midwives opportunities to save money that are not available for employees. In Ontario, midwives work as independent contractors and are considered self-employed. The following tax tips highlight some of the responsibilities and benefits midwives should be aware of when filing their returns.
1. Reporting Income
There are some things that midwives receive or benefit from, which the Canada Revenue Agency considers income but which may not be obvious to the individual midwife. Gross income can include:
- compensation fees;
- funding allocated to midwives' AOMBT accounts (as reported on their annual benefit statements);
- parental leave income from the AOMBT;
- investment income from the AOMBT (e.g., interest earned from a self-funded leaves account, RRSP);
- travel compensation if the midwife is claiming mileage and auto expenses as deductions;
- MPG’s profit divided among practice partners;
- profit share given to associates of the MPG, if applicable;
- funding for equipment purchases;
- professional development fund reimbursement; and
- any other income generated from professional work or otherwise.
2. Claiming Deductions from Income
As self-employed people, there are a number of expenses that can be deducted from this gross income to calculate the midwives “net business income”. These include:
- professional fees (e.g. AOM fees and levy, CMO dues) if not reimbursed by the MPG;
- legal and accounting fees;
- equipment purchased by the midwife (though this may be amortized over time and not all be included in the year of purchase);
- where applicable, the extended health and/or dental coverage of the Health and Group Benefits premium (if not deducted as a medical expense);
- the portion of vehicle expenses related to the business. Since most midwives are reimbursed for their travel costs, there are two options for claiming a personal vehicle as a business deduction.
Either include your travel reimbursement as an income and claim the entire business portion of your vehicle expenses; or deduct the vehicle expenses claimed from the amount reimbursed for travel. Apps such as Mileage Tracker or Triplog may be used to maintain a record of the total kilometers driven to support this deduction.
- Reasonably calculated work-space-in-the-home expenses if the midwife either:
- uses their home office as the main place of business (e.g., clinic space in a midwife’s home); or
- if there is a separate room that is not used for other purposes and which is used for meeting clients on a regular and continuous basis (e.g., phone meetings with clients when answering pages).
If uncertain as to what can be claimed, speak with an accountant or refer to CRA’s guide on Business and Professional Income.
3. Personal Tax Credits Add Up
There are recent changes in personal tax credit limits. Be sure to claim all credits you are entitled to.
- Family Caregiver Amount: As of the 2016 tax year, a taxpayer with a qualifying dependant who has an impairment in mental or physical functions may be able to claim an additional $2,121 for one or more of the following tax credits: spouse or common law partner credit, eligible dependant credit, caregiver tax credit, and/or the child tax credit (for children under 18).
- Medical Expenses: Medical expenses are one of the most overlooked tax breaks. There is a long list of expenses that qualify so it's often easy to reach the threshold of $2,237 or 3% of net income (whichever is less). It is best to combine all family medical expenses on one spouse's return. Travel expenses can also be claimed if you had to travel to get treatment. These expenses include the cost of transportation if you had to travel more than 40 kilometers; and accommodation and meals if travel exceeded 80 kilometers.
- Child Care Expenses: Not only is traditional daycare included here, but also camp fees, babysitters and nannies.
- First-Time Home Buyers' Tax Credit: If a qualifying home was purchased in the previous tax year by a first time home buyer, a person with a disability, or an individual buying a home on behalf of a related person with a disability, there is a $5,000 non-refundable tax credit available.
4. Maintaining Tax Records
Midwives should retain records (see the AOM's template on document retention under the Financial tab on this page) of all sources of income and expenses (i.e., compensation received, travel expenses, travel compensation, professional fees paid and AOM Benefits Trust program details) for six years from the end of the last taxation year to which they apply. If filing a late return, retain all records for six years from the filing date. Where an objection or appeal has been filed, keep all applicable records until the process is finished and the time for filing any further appeals has expired. Records of all transactions, including paper and electronically stored documents that relate to business income and expense claims may be required to verify the amounts reported on an income tax return. These records, along with the original supporting documents (e.g., sales invoices, contracts and receipts) must be kept in Canada or made available in Canada upon CRA’s request.
5. Pay on Time, File on Time
Penalties and interest are both worth avoiding by paying your taxes and filing your return on time. Ontario midwives (unless incorporated), like all self-employed individuals, must file their taxes for the previous year by June 15 to avoid late filing penalties.
Midwifery practices that are incorporated must file tax returns within six months of their yearend and must pay the balance owing within three months of their year-end. The same deadlines apply for individual midwives who are incorporated, however, individuals will also need to file their individual tax return by April 30 or June 15, depending on whether they also have self-employed income to report.
CRA requires self-employed individuals to make quarterly income tax payments for the current fiscal year if the net tax and Canada Pension Plan (CPP) owing for the past two years has been greater than $3000. Instalment payments for income tax and CPP are due four times a year: March 15, June 15, September 15 and December 15. If instalments are required, the CRA will send an instalment reminder suggesting an amount owing and outlining payment options.
6. Missed Slips and Receipts- Make the Change
Tax slips and receipts often go missing, either due to mail problems or simple misfiling. To request an adjustment, complete a T1 Adjustment Form as soon as possible. Failure to report income and false statements or omissions may result in penalty. Penalties may be waived if CRA receives voluntary disclosure of the amount an individual failed to report.
7. Tax Advice Provided by the CRA - A Caution
Many Canadians contact the CRA to obtain information and tax advice. A number of court cases, however, have questioned the prudence of blindly relying upon advice provided by CRA representatives.
Be aware that advice provided by CRA employees may be overturned by a subsequent assessment, audit or court action- with no recourse for the taxpayer. When necessary, it is best to solicit the assistance of a professional accountant with experience dealing with the CRA and tax legislation.
8. Getting Help
At times, CRA will review deductions, credits claimed and whether workers are independent contractors or employees. If contacted by the CRA or another government agency to audit the independent contractor-employment status of associate midwives, call AOM On Call to speak with the Quality and Risk Management team.