If you earn income from a sole proprietorship or partnership, in other words self employed, you’re responsible for tracking your income and expenses and paying taxes. But as you know or will find out, self employed taxes are a bit more complicated than regular taxes.
Ideally, to keep on top of your taxes, they should be paid quarterly or annually to avoid any interest charges or penalties. But many self employed people don’t live in that ideal world and struggle with bookkeeping and accounting.
Derek Chase has been a Licensed Insolvency Trustee for over 25 years and shares his knowledge about filing taxes and avoiding tax debt. In this podcast he covers:
- Different types of taxes for the self employed
- Consequences of missing deadlines or not filing taxes
- Fines, penalties, and interest rates charged by the CRA
- Strategies to stay on top of your taxes
- Advantages of hiring a bookkeeper
If you are struggling with tax debt and need advice, a Licensed Insolvency Trustee should be your first call. They are licensed and regulated by the Canadian government and adhere to strict ethical guidelines.
Read the Transcript
Wayne Kay 00:04
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay.
In today’s show, we’re going to talk about income tax and sales tax when self employed. A lot of people struggle when it comes to these taxes. So what do you need to know? What’s the best way to handle them in your business? What’s your responsibility?
We’re going to learn all that more coming up today with Derek Chase from Derek L. Chase & Associates Ltd. Licensed Insolvency Trustee serving Vancouver Island Sunshine Coast, BC and BC north coast. Welcome back, Derek.
Derek L. Chase 00:42
Hi Wayne, it’s a pleasure to be here today.
Wayne Kay 00:44
Well, I’m looking forward to our discussion about taxes and sales tax. And actually this is interesting because last time you were on, we had a little bit of a discussion and you mentioned something about taxes can really throw people off.
So I’m looking forward to learning more about this. And we’re talking about self employed. So why is there a struggle with this? What are we missing?
Derek L. Chase 01:12
Well, first of all, who doesn’t get excited about talking about taxes? I mean, what a fascinating topic. But it is really important because when you get off side with taxes, it is so hard to catch up.
So it is important for people that are self employed, either as a sole proprietor or perhaps running as a director of an incorporated business, just to take ownership of it and to understand what’s going on.
And so I think, to answer your question, I think self employed people typically, or some people, would struggle just because of the burden that the various levels of government throw on the self employed, which is really startling if you’ve never been self employed.
You don’t really understand how much paperwork is required to deal with different income tax remittances. So I think part of the struggle is the avalanche of paperwork and the other part would be we’re not all bookkeepers. So it can be daunting to take that on when you’re an artist or you have other skills that are not bookkeeping.
Wayne Kay 02:30
Yes, I didn’t realize it was that difficult. And I can understand because when it becomes super hard to do it’s like anything, you don’t want to do it. You put it off and then all of a sudden you miss a deadline and that’s where the trouble happens, right?
Derek L. Chase 02:46
100%. You start missing deadlines and there’s penalties and interest and it just takes on a life of its own. And sometimes you can never catch that, especially if you put it off for a year or two. Probably two years for personal income tax, it gets very, very difficult to catch back up on.
So it’s definitely not something to ignore and rather, like I say, take ownership of it and take responsibility for it and have a strategy to do that. But to try and just convey how continual the bombardment of red tape is to the self employed is difficult to do unless you’ve lived it, because it is constant.
Whether it’s just normal remittances for GST or personal tax or corporate tax, or whether it’s mandatory surveys from Statistics Canada, it’s just a fire hose to try and stay on side of that. And then also run your business, actually make some money.
Wayne Kay 03:55
Wow, you’re selling it really well. That anybody who is on the fence thinking about becoming self employed, they’re probably like, seems like a lot. But are people aware that this is what’s involved with being your own boss?
Derek L. Chase 04:11
I don’t think so. I don’t think so until you’re actually living it.
Do you realize that burden that it takes out of you to do it? And I think that, without doubt, the easiest way to increase productivity in Canada would be on this red tape side for the amount of different forms and returns and filings that self employed entrepreneurs, small businesses, companies that burden.
If it’s lifted even by 10%, I bet that productivity would just surge in Canada because there would be more time and energy for these creative entrepreneurs to do their thing. I think that’s really low hanging fruit that all levels of government. If I was CEO of Canada for a day and I could do anything, I think that’s what I would do, is chop the red tape by 10%.
Wayne Kay 05:14
I think a lot of people are nodding their heads right now and hoping that you get that job. So when you talk about these taxes, which ones are you talking about? Are there specific ones?
Derek L. Chase 05:26
Well, I can almost walk through them per month because you talk about your monthly payroll source deductions, you talk about quarterly GST credits.
If you’re a corporation, you might be making interim corporate income tax installments, you might have personal income tax installments, you’ve got some form of work safe remittances, you could have provincial sales tax, the list goes on and on. So it always seems to be something that needs to be filled in and submitted back to some form of government.
Wayne Kay 06:07
So what’s your advice here on how to best handle this responsibility?
Derek L. Chase 06:15
Well, I mentioned ownership earlier and I think that’s very important. Unfortunately we’ve helped people with some type of insolvency setting where we hear the comment that, oh, I gave this to such-and-such to do and I thought it was done. Or I gave this to my ex spouse to handle and I thought it was done.
Unless you know that it’s at a certain point, I guess you have to trust and count on people to follow through and do things. But as the owner, you still need to know that it’s been done. So to take ownership and be responsible, to know that at least the return has been filed if not paid. I think that’s a big important point is to just have that confidence, to know that the filings are happening.
And if that’s not really something that you’re comfortable in this whole area, then there’s a whole bunch of bookkeepers and accountants out there that are ready to and that’s their job, to do it for you. And I’ve also often told people that perhaps the best money you can spend is to pay someone each month to keep you on track to not get in trouble with the income tax department.
Again, how much is that worth to you? And to me, I would think it’s worth a lot because when the income tax department has a heavy hand, they can start shutting down your bank account, they can start garnishing, and you don’t want to live that life. So how much is that worth to you?
Is it worth $200 a month? Is it worth $500 a month? Is it worth $1,000 a month? I guess it depends on the size of your business, but it’s going to be worth it, in my opinion.
Wayne Kay 08:20
But you probably still need to have a rough understanding of what it is that you need to do just to make sure that it is getting done, even, as you say, when you’re paying people.
Derek L. Chase 08:31
Yes, absolutely. I wager that virtually every accountancy firm out there would love to tell their clients what’s required, what’s involved, because the cleaner that the information comes into the accounting office, the lower the bill, the easier it is on everyone. So it’s a win-win situation there.
If I was advising the business owner, I would say, ask your bookkeeper, ask your accountant, ask the questions until you’re able to understand all of what’s happening and reach a comfort level that you know that things are happening and being done, and then that’s just easier to go to sleep at night.
Wayne Kay 09:13
Well, absolutely, because it’s your name on the business, your name on the forms, and so when there’s some trouble, they’re still going to come back after you. I guess it really is your full responsibility.
Derek L. Chase 09:27
Yes, it is. You start pointing fingers at other people and blaming other people, then that’s just not going to work out well. So it’s important for people to understand that and to take steps to either do it themselves or to farm it out to someone that can have the confidence to know that it’s being done.
Because like I say, it just takes a few missed returns to be offside and then all of a sudden you’re flagged for an audit or you’re paying penalties and interest that you didn’t have to, which are typically not deductible either. So that’s another bummer, right?
Wayne Kay 10:09
And you’ve seen some of this in action. What do these fines, et cetera, look like? Can you walk us through that just in case somebody’s tuning in now and they’re saying, okay, actually this sounds like my story. I missed some paperwork here and I didn’t file this on time. So what does that look like when the government comes after you?
Derek L. Chase 10:32
Well, I’m not going to be able to list off the various interest rates and percentages and penalties. But I will tell you that if someone comes in and talks to us and they say, I’ve got this notice from income tax, and it says I owe $30,000 and I can’t pay it. And, oh, by the way, I haven’t filed for the last three years. Well, we typically would at least double that to $60,000 because the penalties and interests are so high that the amount owing doesn’t sort of gradually rise up on a gentle rise. It goes straight up, goes ballistic.
And so doubling what the initial estimate of what’s owing is not uncommon just to have a working number to figure out what next steps are. And often it’s correct. Once those returns are actually filed, it ends up being double what a person thinks.
Wayne Kay 11:36
My jaw hit the desk. I had no idea it’s that extreme.
Derek L. Chase 11:42
Yes. And then to follow through on that, we’ve talked to other people that have said, oh, I’ve been paying whatever, $1,000 a month, $2,000 a month, some big number to my taxes, and it’s not moving. And that’s because of the penalty and interest that’s accumulating on their account.
So the good news is they can stop that interest and get a reset with their finances by filing a Consumer Proposal or maybe using the tool of a Bankruptcy filing that allows for a reset with the income tax department. And you can stop that horrendous setting of interest and penalty.
But hey, why not avoid it in the first place? And the best way to do that is to find a good accountant or bookkeeper.
Wayne Kay 12:35
Yes, and I guess that would be your suggestion. I’m assuming for some people, money is not their thing. They’re not really comfortable with it, but they’re really good at doing what they do.
So how do we help them? What’s your advice there?
Derek L. Chase 12:57
Apparently there’s more left handers per capita on the West Coast than in a lot of places. And that’s because we have a lot of artists, and I love artists. They’re creative and they just produce such beautiful things.
But left side, right side of the brain, I don’t know. They have trouble with income tax and numbers and filing. And I suppose it’s to get over the hurdle of being afraid of it and either set aside some energy to learn about it and do it yourself or to pay the price to get the experts to help. And it’s got to be one or the other because doing nothing is just not a solution.
Wayne Kay 13:43
I know of people even who do work, and they’re nervous to even send the invoice after, and you don’t get an invoice from them for months. And I think, well, that’s not good for their business or their bottom line.
Derek L. Chase 13:56
Yes. That sort of heads towards another angle, which is really just cash flow management and it can be difficult, especially when you’re starting out to write a big bill to your customer because you’re uncomfortable with that feeling and you just haven’t done it before.
But I think over time, that goes away. And putting the right value on your services is important. And like you say, getting that out on a timely basis. Because if you don’t have that cash flow or enough capital to begin with, then the temptation to dive into the money that should be remitted to the income tax department is very high. And then you just don’t have that money for the tax payment when it’s due and that can start that cycle that we’ve been talking about as well.
So the whole aspect of being well capitalized or having enough cash or capital to wait for your accounts receivable to come in and have money on hand or just to deal with the unexpected is a big factor in businesses surviving or not surviving. So managing that cash flow, part of that would be to bill on a timely basis and would strongly recommend that people do their billings at least once a month.
Wayne Kay 15:20
Yes, okay, that’s great advice. Where do you go from here? Gone through all this information about income tax, sales tax, you’re self employed, what’s your final advice?
Derek L. Chase 15:31
I think it circles back to that ownership piece of just understanding what’s been filed, what hasn’t been filing and what hasn’t been filed. And how do I stay on top of this and make that choice between either putting the energy in yourself or to hire it.
Wayne Kay 15:46
Yes, great advice. So you can get through it.
Derek L. Chase 15:49
Absolutely. Yes, it’s highly doable, but it does take a lot of energy.
Wayne Kay 15:54
Well, that’s definitely what my big takeaway was, how much energy it takes and how complicated they make it. And if somebody’s going through this, it sounds like, don’t worry, you’re not alone. Most people who are dealing with income taxes, all this stuff when you’re self employed, it’s a bit of a struggle anyway.
Derek L. Chase 16:13
It is a tough battle and like I say, I wish the red tape would decrease, but it is what it is and we’ve got to deal with what’s in front of us now. And most people that are in business are doers. So just get it done.
Wayne Kay 16:28
Right on. Derek, I appreciate your time, thanks for all this information.
Derek L. Chase 16:33
My pleasure, Wayne. You have a great day.
Wayne Kay 16:35
My guest today, Derek Chase. You can learn more or schedule a free consultation with Derek L. Chase & Associates Ltd. Licensed Insolvency Trustee by going to the website bankruptcytrusteebc.ca. That’s bankruptcytrusteebc.ca.
And that is it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out Debtmatters.ca. Thanks for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.