Last updated on December 1, 2020
TAX TIME!!! Mark C contributed this helpful pair of posts quite a few years ago. The info is as good now as it was then, and considering the time of year, quite timely. (thanks to Chris Dainty for the suggestion)
Tax time is almost upon us, and at this time of year many freelance animation artists are busy preparing a mess of receipts and write offs. It usually takes a few years to figure out exactly what can and can’t be written off, and many artists struggle to take full advantage of all the tax breaks available to the self-employed. Most of my industry experience has involved freelance self-employment, and I would like to share some advice with those of you who could use it.
1) Get an accountant.
This is simply the best advice I can give. A personal accountant with experience in self-employed income tax returns will be worth their weight in gold to any freelancer. They are available to answer any questions, clear up any confusion, and will be there, representing you in the event of an audit. The easiest way to find an accountant with some knowledge of freelance artists and their needs is to ask a local established freelance veteran which accountant they use, and go to them. H&R Block (or similar income tax return factories) will not have the focus or understanding of the specific requirements of your industry, and it’s likely you will not develop the critical personal relationship with your accountant that can be so important in your career.
2) Be as organized as your artsy brain will allow.
I keep my records VERY simple, I pile all monthly household bills and bank statements in one spot, and all applicable receipts in a shoebox. I don’t separate receipts and such throughout the year because I know I will not be consistent in dealing with them. In February before tax time I take a few days to organize, separate, and calculate everything. It’s daunting, but it’s the method that works best for me, you may find organizing your receipts and paperwork once a month for two hours is best for you. Formulate a plan that works best for you, and stick to it rigidly, every receipt counts and it is best to be organized.
3) Contribute to RRSPs.
There are few animation companies that offer a retirement plan or a pension, so you need to invest in your own retirement. These types of investments also become a huge write-off at tax time for any self-employed artist, often knocking you down a tax bracket and strengthening all your other write-offs in the process.
4) Avoid Dodgy write-offs.
Anything suspicious could trigger an audit and an investigation into your home based business or freelance status. The government can go as far back as 7 years of income tax returns, and one flagged animator could lead to investigations of other animators in your region. I tend to avoid single meal receipts (obviously not a business meal), most non-animated movie receipts, most comic book receipts, receipts for furniture or home repairs that are not for my office space etc. I basically cull some of the receipts in order to leave a more defensible and rational business case, and I expose less of myself to a painful re-assessment. Your accountant will definitely help you with this as they are aware of what ‘stands out’ and they will not submit your return with their name on it if they are not confident it can be defended and justified. If you have an accountant that lets you write off anything you want, then you have a dangerous potential problem.
5) Understand how the GST works.
The GST has bitten many many freelance artists since it’s inception and it’s important to know when you need to start charging the GST (or HST for Nova Scotians) for your freelance services. The basic rule is, once you make more than $30,000.00 in SELF-EMPLOYED INCOME in ANY given fiscal year, you need to register with the government, get a GST number, and start charging your clients GST on your services. Once you clear the $30k threshold you must ALWAYS charge the GST on every freelance transaction even if in future years you make far less than $30k. Basically once you get a GST number, you will always need to use it. You charge the client GST and then you must bank that amount, because the government will expect it at tax time. It’s not your money, you’re just holding it. Each year I owe my own income taxes AND all the GST I’ve collected over the year to the government, it’s very easy to get caught spending out of your GST money, and the tax debt can swallow you whole if you’re not careful. If you neglect to register and you make more than $30k the government may expect you, and you alone, to cover the tax that ‘should’ have been collected, so you need to be proactive in setting up your GST number.
6) Save a portion of your cheques to cover your taxes.
You WILL end up owing taxes if you are freelancing. No taxes or government contributions were stripped from your earnings and it’s doubtful your write-offs will wipe out your tax debt, so chances are you will owe. It’s critically important to save as your year progresses on every cheque you receive. This is very hard, especially if work is sporadic or lean, it’s very easy to spend all you earn when things are slow, leaving the tax owing a problem for another day, but that day of reckoning will come and you will need to do your taxes. I’ve seen many freelance artists caught in a feedback loop of owing a bit more every year, taking a bit longer into the new fiscal year to pay off last year’s debt, falling behind to the interest and penalties. It’s very easy in our inconsistent industry to get caught short, so be thrifty and save.
7) Maintain some freelance status even after you become an employee.
Your write-offs are valid every year that you try to run a self-employed home based business. These write-offs can be very valuable even if your main job is as an employee. Try to do a bit of freelance work on the side to maintain your office write-offs and to justify all of your collected receipts and you can see a significant return while you are an employee as ALL your receipts (business expenses) are written off against your now tiny self employment income.
Stay tuned for part two, where I will break down all the write-off categories and give examples of the type of receipts that apply to each. ~M
Thanks for all those precious advices!
I have something to add about GST. 🙂
What is included in the 30 000,00$ dollar margin is only the “taxable” services. Any freelance non taxable money you receive is not included in this limit. (you can find a list of the taxable and non taxable services on Canada Revenue Agency website)
The most interesting point about this is that any freelance business you do with a foreign client is not taxable. Half of my income came from USA clients outsourcing to me, so I was very glad I didn’t have to charge taxes at all.
Also, the 30 000,00$ dollar limit is not calculated within a fiscal year. It’s calculated after the end of each trimester. So you must not exceed this amount inside a period of 4 consecutive trimesters or less, even if those trimesters are, let’s say, the last two of 2008 and the first two of 2009. So you should keep record of your taxable incomes at the end of each trimester.
But don’t worry, government is not too much of a shark and he won’t ask you to pay the taxes you should have been collecting once you realized you exceeded the amount. You have a certain period of time (I think it’s one month) to register to GST and then start collecting the taxes on your next invoices.
The only case where the government will ask you to pay the taxes retroactively is if you reached the amount of 30 000$ in a single trimester.
Let me know if I am wrong with all this!!
🙂 Can’t wait to read the rest of your advices Mark! I’m pretty confused with those receipts things!
The GST can be very confusing and you raise some excellent points. I was unaware that you only need to make the $30k in a single trimester, I thought it was a fiscal year, so that is excellent info to add. I didn’t know about the foreign client info either, I’ve only ever worked with domestic clients in a freelance capacity. The government is not too much of a shark it’s true, but the one month grace period is not a long time when you consider many people are not aware you have to charge GST at all. I’ve had friends get up over $60K or $70K before they learn they have to charge GST, and it could be a difficult task to go back and ask the company who paid you for your services to send you a cheque for GST. This actually happened to me when I was working in Ottawa for Funbag Animation, I crossed the $30k threshold without even thinking about it, my accountant informed me I needed to go back and invoice for the GST, and Funbag was cool about cutting me the cheque months after the fact. I shudder to think what would have happened if Funbag wouldn’t cut the cheque or couldn’t cut the cheque.
Hi! Thanks for summing up how to prep our taxes for freelance.
If I may add another side note, in regards to point #6, I would also advise one to save a portion (30%) of your Employment Benefit (EI) checks, if one had used this service in 2009. Many are unaware that EI can be subject to EI clawbacks, which mean that if your net income exceeds a certain net amount ($52,875 for 2009) you will be required to repay 30% of either what you made above the threshold, or your total regular benefits received.
I mention this because people may have been on EI for part of the year, before moving on to freelance work to make an income. This can be an unexpected surprise in the amount of taxes owed!
There are certain conditions/exemptions for this to apply, so please view this link to the Service Canada site, explaining EI Repayment for 2009 http://www.servicecanada.gc.ca/eng/ei/information/repayment_2009.shtml
I hope this helps!
You make a great point with EI, this has happened to me once as well. Often when you collect EI it’s because you need to in order to bridge a gap, but if you have a great second half to your year with freelance income you can get a surprise when the government wants you to pay back a chunk of the EI you took. Great advice, thanks for adding the link and the input.
So I just finished my first year doing primarily Freelance work and I just wanted to stress – sadly from personal experience – the importance of heeding point #6. I did not save the tax money, because I ignorantly assumed I had enough tax credits left from school to cover this year… I was wrong, I misunderstood how they get applied and am now stuck paying a large sum.