Freelancing Finances – Spreadsheet

May 14th, 2019 by Potato

I mentioned back in the guide to Canadian taxes for freelancers that I don’t use fancy accounting software for my side business, just a spreadsheet. A reader asked to see a sample of how such a sheet would look, and here we are.

TLDR: click here to download the template for Excel.

Click here to view the template in Google Drive (link set to make a copy, which may prompt you to log into your Google account — this one to view the template).

In brief, I like to lay things out into sections to help me keep track of my sources of income and expenses, and this is laid out that way. I can create a new tab for each year.

Everyone’s business and taste in spreadsheets will be different, so this may not suit you. For example, you may not have any inventory to track, or you may have many things to track rather than a single book to sell. In my case, I have a whole separate tab for direct book purchases (and postage) because I may have a hundred in a year (vs. only a few lines for consulting/editing/royalty/other income). And of course, I’m a small supplier, so I haven’t built HST tracking into this.

My One Big Tip is to remember what you’re going to use all this information you’re tracking and calculating in your spreadsheet for. Down the road, you will have taxes to report, so if you’re filling out a T2125, you’ll want to make life easier on yourself by making it clear how your personal tracking methods will map over to that CRA form. You might have other purposes though, such as tracking your own progress, planning your business, cash flow, etc., so you may also track things that aren’t relevant to your taxes alongside information that is, or calculate things in different ways for your own use.

While I’ve spread things out, you might want to track a single column of revenue and expenses (perhaps then with a note for each line). In the end revenue will all go on a single line, but it may be useful to you to see the different sources (and make it easier to cross-check bank accounts or invoices later if you need to double-check). Your own organization will have to make sense to you and your business; another example might be to organize revenue sources by provinces with different HST rates (if you collect HST). For the expense side again you can use a single big column, but different sections for your expense categories can make your life easier come tax time (esp. with notes about how things will work).

I have a net income for personal use calculation, and I note that it’s for personal use because the calculation for taxes will be different, and that’s not what it’s for in the snapshot on the spreadsheet. For example, I don’t include business-use-of-home expenses when looking at my side business income (they’re already in my personal budget that I need the income to pay for), and while only a portion of some costs (like 50% of business meeting meals) are eligible expenses for tax purposes, I consider the full cost when making decisions. You can create your own net income line to either line up with the tax calculation, or to include certain items for your own planning purposes.

When it comes to keeping receipts, I’ll either have a physical folder in my filing cabinet with paper receipts, or they will be electronic receipts that are either sitting in an email folder somewhere or downloaded to a folder on my computer. Likewise for invoices/sales — some have invoices, some are email notifications of income (e.g. royalty income, advertising income) that then shows up in a bank account, and some have other ways of tracking (e.g. WooCommerce for direct website sales). In all cases I want to make my reconciliation easier by having some indication of where to go to find the supporting documentation. Sometimes that’s an explicit note (this is in an email dated X) and sometimes it’s in my head based on the organization — all postage receipts are in paper in the physical folder, all direct book sales are tracked through WooCommerce unless otherwise noted, all consulting gigs have PDFs of invoices in a folder on my computer. So breaking the items up into groups in the spreadsheet works with this system.

And finally, be kind to your future self and leave helpful notes on things. If you have to look something up while filing your taxes, odds are you’ll need to know it again next year (e.g. “yes, every year you check and you can include insurance as a business-use-of-home expense (appropriately pro-rated)” or “the category names are dumb, ‘stationery’ doesn’t actually include stationery, that goes in ‘office expenses’, and I really need to see if the CRA needs a good technical writer who works from home.”) I’m not concerned about my notes fitting in the cells — I don’t generally print this out, so as long as I can see “note” I can then click on the cell to see it. You can also use the comments function if you like, or set up a separate notepad area of your spreadsheet — it’s your spreadsheet, make it work for you!

Anything to add? Anything wrong? Anyone have their own (sanitized) sheets to share?

Rest of the Guide to Canadian Taxes for Freelancers:

I’m not an accountant, and I’m certainly not your accountant. Tracking your finances and reporting your taxes is ultimately your responsibility, and this post & spreadsheet are provided as-is for education and entertainment without any guarantees. Further, remember that tax rules can change and may make this content even more useless.

Taxes and Investing: Orientation

April 4th, 2019 by Potato

This is not a detailed how-to post, instead this is a quick orientation to taxes and filing involved with investing.

First off, there are tax shelters: if you’re doing all of your investing inside an RRSP or TFSA, you don’t have any worries: other than any RRSP contributions (which you get receipts for) or withdrawals, you don’t have anything to report on your taxes. Not only are your investments growing tax free inside those accounts, you don’t have to do any detailed tracking or reporting.

If you’re out of RRSP and TFSA room and are investing in a taxable or “non-registered” account, you’ve got some things to know.

On timing: you’re likely not going to be able to file your taxes until April: some tax slips (i.e., T3s) aren’t due until the end of March.

You’re going to have the responsibility to learn about and report your situation for your taxes (and hey, self-promotion time, I’ve got a course that includes a great module on that). Things to watch out for:

First (and easiest) is income that gets reported on a T-slip. Dividends and interest payments. In this case you need to get a T3 or T5 from your financial institution or brokerage — if it didn’t come in the mail, be sure to log in to your account in April and look for an electronic version to download. It might also be auto-populated in the handy new myCRA feature that connects to your tax software of choice. Reporting this is a snap: you copy the amounts from each box on the tax slip into the corresponding box in your tax software for your return.

Second is interest or other income that did not get reported on a T-slip. The biggest culprit is savings accounts: your bank only has to send you a T-slip when the interest for the year is over $50, but every dollar of interest is taxable even if you don’t get a slip. You’ll have to go through your statements, add up those pennies of interest yourself, and then report it (look for line 121).

Third, and the one that seems to cause the most grief, is capital gains. You only report realized capital gains — you don’t have to pay tax or report when the value of your investments goes up, only when you sell it (or transfer it into a TFSA/RRSP, which is called a deemed disposition). You will get a tax slip in many cases (a T5008), but this will more often than not be wrong or be missing information. So this one you might choose to set aside in favour of your own calculation that you report on schedule 3 (and you’ll have to do this anyway to verify that your T5008 is correct unless you have a lot of faith in your brokerage). You’ll need to know your adjusted cost base (ACB) to report your gains, which requires tracking over all the years you’ve held the investment — this post and spreadsheet will help with that.

There are some other rare things to be aware of, for example if you have more than $100,000 CAD (cost basis) in foreign investments, you’ll have to fill out a T1135, which is separate from your overall tax return.

Tax software: While you can pay more for “premium” tax software that includes a “wizard” to guide you through reporting your investment income, it’s not necessary. The forms are included in all tax packages, including SimpleTax [affiliate link*], Turbotax standard/online, etc.

* – it’s pay-what-you-like, which includes free, so it’s weird to have an affiliate link, but if you do choose to pay and you use my link, I’ll get a portion.

And disclaimer: filing your taxes correctly is your responsibility, including verifying anything you read on a Potato-powered blog. Hire an accountant if you’re not sure — and note that I am not an accountant.

Never Weight – Q1-19 Update

April 1st, 2019 by Potato

The quarter was pretty good. I followed up last year’s success by continuing to lose approx. 2.5 lbs/mo (or about half a pound a week), and made the major milestone of no longer being obese! I am now medically merely “overweight” and ahead of schedule! :)

Mission Accomplished, banner on USS Abraham Lincoln, original public domain via Wikimedia

I use the “Mission Accomplished” image with full awareness of the irony: the job is far from done. Even to just maintain here I have to continue to keep up the processes that have been working (i.e., diligent tracking until my body learns a natural setpoint). Now that I’ve reached a major goal, I don’t actually know how much more weight I should aim to lose. Getting all the way down to “healthy” seems audacious, even after losing so much over the last year. I can definitely stand to lose another 10 lbs at least, so I figure let’s keep going at this new modest pace of ~0.5 lbs/week and see where things stand in another quarter or two.

The curling season has come to an end, which is sad, and also means I need to find another route to get myself exercising through the summer. While I didn’t do very well in any competitions, I had a tonne of fun curling this year, and hope to get Blueberry into the sport next year in little rocks. And speaking of curling, of all the TV stations out there I never thought I’d be on TSN, not even for a few seconds in the background:

A picture of TV showing Curling Day in Canada with me kind of fuzzy but totally there on the ice.

Last year I lowered the price of the course as a punishment for missing my target, and to help motivate me to get back on track. This year I feel like celebrating, and somehow lowering the price again feels like the right move despite the opposite motivation. I’ve lost 17% of my bodyweight, so you can use coupon code missacc to save 17% off the course, good through Q2.

Swap-Based ETFs and Budget 2019

March 20th, 2019 by Potato

I’ve perhaps been one of the more paranoid bunch on the topic of swap-based ETFs. They offer some attractive tax benefits, particularly for high income earners, so some people are naturally excited by them, but I’ve been kind of ‘meh’ on them and haven’t included them in my various tables of model portfolio options (and not without a disclaimer). The benefit isn’t quite as large for people in middle tax brackets (which I believe is the core of my readership) vs high-income earners who love them, and there’s that ever-present legislative risk. Perhaps it’s because I owned units in some income trusts in 2006, but this seemed like one of those too-good-to-be-true bits of alchemy (international dividends into deferred capital gains! poof!) that was begging to be closed.

I don’t see details yet, but it looks like Budget 2019 is going to address it:

To make Canada’s tax system more fair, Budget 2019 proposes to:
• Prevent the use by mutual fund trusts of a method of allocating capital gains or income to their redeeming unitholders where the use of that method inappropriately defers tax or converts fully taxable ordinary income into capital gains taxed at a lower rate.
• Improve existing rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains taxed at a lower rate. [page 209 of the English Budget 2019 PDF]

Horizons has a short note up on their site here.

If you don’t yet own any, perhaps wait a bit longer before making the switch from vanilla ETFs. If you do own them, for now, I suppose just wait and see specifically what happens with them. In the meantime, Ben Felix put up a good video on how the swap-based ETFs work.

Update: Thanks to Reddit user DavidsonWrath for pointing me to additional details, which are very dense legalese.

Meltdown RRSPs for Future GIS Recipients

February 22nd, 2019 by Potato

Retiring on a low income, particularly where you expect to get GIS, changes a lot of conventional wisdom about saving for retirement. An RRSP can work against you, as you face a high effective tax rate for withdrawals due to GIS clawbacks. For more on retiring on a low income, listen to the Because Money podcast with John Stapleton.

A while ago I showed you how to defer taking your RRSP deduction, but in most cases it’s not worth doing. Could the case of someone expecting GIS be an exception?

The scenario: someone in the lowest tax bracket (let’s use 20% as a nice round number) put money in their RRSP before hearing that it might not be a good move for them. They haven’t claimed the deduction yet, so should they defer taking it until GIS starts and they withdraw from their RRSP?

Option 1: Take the deduction right away. Let’s assume this person will be grossing up their RRSP contributions when taking the deduction to make things a little more comparable. So $1000 in the RRSP thanks to that (but only $800 if they had not taken the deduction or were using a non-registered account).

Over time with investment growth, they have $2,000 to withdraw. But now their effective tax rate is 70% (20% base rate plus 50% GIS clawback). So a $2,000 RRSP withdrawal turns into just $600 in spending power — less than the $800 in after-tax money they put there in the first place, despite doubling in nominal value!

Option 2: Defer taking the deduction. That means the “government’s portion” won’t be growing along with their funds, and isn’t there to gross-up the contribution, so to be comparable there’s only $800 in the RRSP to start. With investment growth doubling the value as before, that turns into $1,600 to withdraw in the future. They can then withdraw that, but have $800 in carried-forward deductions to use against it, so only $800 is left as taxable income. Again at a 70% effective tax rate on the taxable part, that leaves $1,040 to spend. In this case deferring the deduction did help compared to taking it right away.

Option 3: Bail out. If you haven’t yet claimed the deduction, another option is to just bail on the RRSP. Withdraw the following year, use the deduction to cancel that out (no time yet for growth to have happened, so the deduction is approximately equal to the contribution), and invest in a non-registered account (we’re assuming the TFSA is full). So you invest $800 in a non-registered account and again have it double over time to $1,600 (assuming all deferred capital gains for simplicity). Then in retirement you sell the investment. Half of the gain gets added to your income: so of the $1,600 total value, $800 is principal and tax free to spend; of the $800 gain $400 is taxed. At the 70% tax rate, that’s $280 in tax, leaving $1,320 to spend.

Conclusion: While this is a scenario where deferring the deduction works out better than taking it immediately, it really just underscores that RRSPs are terrible vehicles for people who expect to get GIS. You’re likely going to be better off just melting down the RRSP while you’re still working and investing in a non-registered account before retirement.

This was a quick back-of-the-envelope post, but my intuition at the beginning of the question was that bailing on the RRSP and using a non-registered account would be the better choice for someone expecting GIS in retirement. Please let me know if you have corrections to the math or assumptions.

Post-script: RRSP Meltdown. So this all suggests that if you had made RRSP contributions as a low-income earner expecting GIS in retirement, you could be better off melting down your RRSP while you’re still working. If you can withdraw those funds and pay tax at a 20% rate, then invest in a non-registered account, it may work out better paying a high tax rate on the growth than waiting and paying a high tax rate on the entire withdrawal (even if you get some further tax-free compounding). Proof left as an exercise for the reader.