Ask an Expert
Business and taxes
Expert: Julie King
Kevin Johnston asked:
I have just completed my registration for my company, a web design company. I am living in Ottawa. I work alone, from home- part time (until I am secure). I have a few questions in regards to taxes.
If I purchased a computer a few months ago, BEFORE I registered myself as a business, am I allowed to claim that as a business expense? I find the explanations regarding taxes to be difficult, and I am wondering what I can claim from my business. Do I have to claim my office and computer?
Secondly, Must I have a contract for people I am doing web sites for? Can I make it up as I go, without it being read and or approved by a lawyer? Invoices, do I need one? What if I accept cash with no receipt? And if a company pays me in cash, can they claim my web design as a business expense?
Julie King answered:
You've asked a number of questions, so I'll do my best to help you with some answers.
Taxes: Yes, they are very tricky to understand, especially at first. Expenses and assets are not one and the same. Your office rent is an expense, but your computer is a capital asset. You can claim a portion of your rent based on the percentage of your premises that is used for business purposes. For example, if you were renting a 1000 ft2 apartment and used 200ft2 for your business, then you could claim 20% of the monthly rent as a business expense. A computer, however, does not get added to your expense column. Instead, it is added to the asset side of your balance sheet, and at the end of each fiscal year you can claim some depreciation as an expense. The depreciation amount that you can claim is set by CCRA, and is known as the Capital Costs Allowance (CCA).
Here is an article on CanadaOne that can help you understand some of the basics: http://www.canadaone.com/ezine/nov01/balance_sheet.html
As for how you would claim the computer, you'll want to get input from an accountant on that point. Since you are depreciating the value of the computer your accountant will probably suggest that you "roll" it into the business for a fair amount - since it's new basically the amount you paid for it - and you will then be able to apply depreciation at the end of your first fiscal year. Your accountant may also have you roll other assets into the business, such as office furniture, in a similar manner.
Contracts: You are not legally required to have a contract for people you are doing websites for, but one is highly recommended. A signed contract will help you collect money if and when a customer refuses to pay. If funds are tight, you may want to do up a simple contract that references a proposal. However, you won't have the advantage of having a lawyer suggest terms that will protect you.
If you plan to draft a contract yourself, here are some links that will help (please note, these may not be based in Canada, and laws do vary):
Boilerplate contracts for web professionals (free download): http://www.webprosnow.com/html/boilerplatecontracts.html.
Sample contract & terms from other web firms: http://www.wilsonweb.com/worksheet/pkg-con.htm.
If you are very concerned about protecting yourself with a good contract, you may also want to consider Error & Omissions insurance, which is designed to protect your firm if you are sued due to an error or omission. However, it can be quite expensive, especially for high tech firms.
About the author
Julie King is the co-founder and managing editor of CanadaOne, Canada's first small business portal.