Below are some typical start-up costs:
- Telephone installation (business line) or dedicated cell phone
- Computer, printer, modem/router
- Business application software (other specialized software)
- Desk, chair
- File cabinet
- Office supplies
Taxation is covered in part in Unit 3, Legal Issues. There are, however, some issues specific to consultants that are addressed in this section. Note that the contents of this section may be subject to change by Revenue Canada and should be verified in the current year.
Under the Income Tax Act, a business includes a profession, a calling, a trade, a manufacturing company, or an undertaking of any kind. Business income includes income from any activity you conduct for a profit or with a reasonable expectation of profit.
All business income is taxable. Income must be recorded when the service or undertaking is completed.
There are two types of income reporting used by businesses: Accrual Method and Cash Method.
1. Accrual Method:
Income is recorded when it is accrued not when it is paid. Money that is earned in one month but not paid until the next month is recorded as income in the month it is earned (but not necessarily received).
2. Cash Method:
Money earned and received is recorded in the month it is received.
As a consultant, Revenue Canada Taxation requires you to use the Accrual Method.
All self-employed individuals have a fiscal period ending December 31. Whether you started your business on June 15 or on February 2, your year-end or fiscal period ending would be December 31.
(Note: If you are operating as a business type other than sole proprietor, for example, a corporation please refer to Unit 3, Legal Issues or consult with your accountant or lawyer.)
Revenue and expenses must be recorded on a daily basis. There are different methods by which you can maintain your records. Many consultants employ a simple, manual book of records utilizing column paper to record transactions. These are available in most business stores. Other consultants prefer to use computer software such as Quick Books or Simply Accounting. Revenue Canada does not endorse any particular system. Its main concern is that you maintain accurate records to show what money is coming in and what is going out. Unit 7, The Buck $tarts Here provides a detailed explanation for maintaining records and reporting income. Your net profit or loss is calculated by deducting expenses from gross income. You may want to consult with an accountant to ensure that you are declaring allowable expenses for your consulting practice.
Statement of Professional Activities
Appendix A – Statement of Professional Activities, Form T2032 is provided by Revenue Canada. It is not mandatory that you use it. As a self-employed individual, you are required to attach to your tax return a statement of income or a Statement of Professional Activities. This form provides a guide to expenses which you can claim. Guides are available free of charge through your local tax office.
Home Based Business Deductions
Many consultants operate from home. Revenue Canada permits a business-use-of-home expense, in other words, using part of your home or residence as an office. You can deduct expenses for your business use of work space in your home, as long as you meet one of these criteria:
1. It is your principle place of business, or
2. You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet customers.
Revenue Canada permits some deductions for maintenance costs, heating, insurance, electricity and cleaning materials. You may also deduct a portion of your property taxes, mortgage interest, and capital cost allowance
If you rent your home, you can deduct the portion of the rent and any expenses you incur that relates to the workspace.
You cannot use these expenses to increase or create a business loss. Read through the Guide provided by the taxation office or consult with an accountant to ensure that you are claiming all of the deductions to which you are entitled (but no more).
Each municipality establishes bylaws for home-based businesses. Contact your local municipal office to obtain a copy for the community in which you live.
There are many ways that you may set your consulting fees. You may charge by the hour, the day, the month, or by project. Before establishing a fee structure, research the marketplace to determine what your competitors are charging and what your potential customers are willing to pay.
Below are examples of pricing calculations:
Daily billing includes three components: labour, overhead and profit.
Assuming your salary while you were employed was $42,000. Divide this amount by 261 (261 is the number of working days in a year excluding weekends and holidays). Your daily labour rate would be $160. Note that you may want to adjust this amount based on your research of wages for the profession or type of work you are performing.
Overhead expenses include fixed and variable expenses, and indirect and direct expenses.
Fixed expenses are those costs which are constant and not based on your volume of business activity, for example rent, heat, and insurance.
Variable expenses are those that can change based on business workload, for example office supplies, gasoline, and postage.
Direct expenses are those incurred on behalf of a specific client, for example computer time, photocopying, telephone calls, fax charges, and out of town travel.
Overhead includes total monthly expenses times 12. Divide by 168 (168 days represents the average number of billing days per year you have available. As there are 21 days a month of potential billable days, typically, the professional practice is that one-third of that time is non-billable).
For example, if total overhead is $1610 per month, then daily overhead is $115 per day ($1610 x 12)/168 = $115).
The amount of profit you build into your fee will depend on many factors such as your expertise, the demand for your service and the competition in the marketplace.
Consultants generally expect a profit in the range of 10 to 30 percent over and above labour and overhead costs. For example, if the profit rate is 15%, the calculation is as follows:
Daily labour ($160) + daily overhead ($115)= $275
0.15 x 275 = 41.25
It is usual for a consultant to round to the nearest $25 amount. Therefore, profit is $50.
Daily rate is $275 + $50 = $325.
Divide your daily rate by 8 hours and round to the nearest $5 amount. For example, $325 / 8 = $40.65. The hourly rate would be $45.
Fixed Rate Plus Expenses:
With this pricing method, charge a fixed rate for your services, and have your client pay all your direct expenses relating to that service in addition to the fixed rate. To determine a reasonable fixed rate, complete the process for calculating a daily rate, but exclude direct expenses which would be charged to individual clients.
This percentage is usually based on the cost of the contract that you are working with. Engineers and architects sometimes use this method.
Contingency fees are based on your performance on behalf of the client. An example may be appealing an income tax assessment, appealing a decision by Workers Compensation, bidding
Consultants may be called upon by a client on a fairly frequent basis to provide advice, much like a lawyer. A retainer fee may be set in advance and is usually for a specified number of hours per month.
Click on Worksheet 7.3 to calculate your fee structures.