Professionals and tax: practising on your own or in a partnership

If you practise a profession on your own account, as a sole proprietor or as a partner in a firm, your profit is self-employment income and goes on your personal return. The CRA treats professional activities as their own category of business, but most of the rules are the same as for any other business. The main differences are how you count work you haven’t finished, and the professional bodies, partnerships and corporations many professionals deal with.

Reporting your professional income

Report your fees and expenses on Form T2125, Statement of Business or Professional Activities, filling in the professional income part rather than the business income part. If you have both business income and professional income, fill in a separate Form T2125 for each.

A few rules frame the year:

• Accrual method. Only farmers, fishers and self-employed commission agents can use the cash method. Professionals report fees when they earn them and deduct expenses when they incur them, whether or not money has changed hands.
• December 31 year-end. Self-employed individuals generally have to use a calendar year. If you’re eligible to use a different year-end, Form T1139 reconciles your income to the calendar year.
• Deadlines. Your return is due June 15, but any balance owing is due April 30. If you owe enough tax, you may also have to pay instalments on March 15, June 15, September 15 and December 15. See our deadlines guide and instalments guide.

Your fees include everything you receive for your services, including payment in goods or credits through bartering.

Work in progress

As the CRA’s current guide puts it, a professional’s income normally includes the value of work in progress (WIP): goods or services you haven’t finished providing at the end of your fiscal period. In practice, your professional fees for the year are:

• everything you received in the year for professional services, whenever you provided them,
• plus amounts owing to you at year-end for services you provided in the year,
• plus the value of your WIP at year-end that you haven’t been paid anything for,
• minus the amounts owing to you at the end of last year,
• minus the WIP you included in last year’s fees.

So keep track of unbilled work as well as invoices, and value what’s in progress at your year-end. The same idea applies to corporations: the CRA’s T2 guide says a professional corporation can’t use billed-basis accounting, meaning it can’t elect to leave the value of WIP at year-end out of its income.

Dues, fees and other expenses

As a rule, you can deduct any reasonable current expense you incur to earn your professional income, but only the business part of anything you also use personally. Some that come up often for professionals:

• Dues and licences. Annual dues or fees to keep your membership in a trade or commercial association are deductible, as are annual licence fees and subscriptions to publications. Dues to a club whose main purpose is dining, recreation or sport aren’t.
• Professional fees. Legal, accounting and other outside professional fees, including the cost of preparing and filing your income tax and GST/HST returns, are deductible. Legal fees for buying capital property are added to its cost instead.
• Insurance. Ordinary commercial insurance premiums on the buildings, machinery and equipment you use in your practice are deductible.

If you’re a professional working as an employee instead, you claim employment-related dues on your return as union and professional dues: professional board dues required under provincial or territorial law, and professional membership dues or professional or malpractice liability insurance premiums required to keep a professional status recognized by law. Initiation fees, licences and special assessments don’t count.

Our guide to what you can deduct covers home office, vehicle and capital purchases.

Practising in a partnership

A partnership doesn’t pay income tax itself. Its income or loss flows through to the partners, who each report their share on their own return, whether the share was paid out or credited to their capital account. Most partnerships with individuals as partners have to file a partnership information return by March 31, and partners in those partnerships take their share from their T5013 slip, which shows professional income in its own box. A partnership with at least one partner who is an individual or a professional corporation generally has to have a December 31 year-end.

On your Form T2125, enter your share from the T5013 slip, then deduct expenses you paid yourself for the partnership’s business and weren’t reimbursed for, including business use of your home. Two points to know:

• Only the partnership can claim capital cost allowance on property it owns; individual partners can’t.
• If the partnership is registered for the GST/HST, you may be able to get back the GST/HST you paid on expenses you deducted yourself, such as vehicle costs, with Form GST370. You include the rebate in your income for the year you receive it, except the part that relates to capital cost allowance, which reduces the property’s undepreciated capital cost instead.

Professional corporations

For tax purposes, the CRA defines a professional corporation as one that carries on the professional practice of an accountant, dentist, lawyer (including a notary in Quebec), medical doctor, veterinarian or chiropractor. A corporation has to file its own T2 return for every tax year, even when it has no tax to pay. A professional corporation that’s a member of a partnership and carries on business in Canada has to have a December 31 year-end, and, as noted above, a professional corporation can’t leave its work in progress out of income.

Our guide to whether to incorporate walks through what changes when you incorporate and the questions to ask first, and paying yourself compares salary and dividends.

GST/HST

Whether you charge GST/HST depends on what you supply. Legal and accounting services are taxable. Most health, medical and dental services performed by licensed physicians or dentists for medical reasons are exempt, and you generally can’t register if you provide only exempt supplies.

If your services are taxable, you have to register once you’re no longer a small supplier, that is, once your worldwide revenues from taxable supplies, with those of your associates, are more than $30,000 in a single calendar quarter or over four consecutive calendar quarters. You can register voluntarily before then, and once registered you may be able to claim input tax credits. Our GST/HST registration guide explains the test.

What to do

• Track unbilled time and work in progress, and value it at your year-end.
• Keep receipts for dues, licences and professional fees, and your partnership’s T5013 slip. Our record-keeping guide covers how long to keep them.
• If you’re in a partnership, keep a list of expenses you paid personally so you can deduct them from your share.
• Check whether your services are taxable or exempt before deciding on GST/HST registration.
• Estimate your tax and CPP with the income tax calculator, and read our guide to CPP for the self-employed.