The automation of the tax preparation and filing process has been a boon to individuals and tax preparers alike. Gone are the days of struggling to find the right box on the return, adding everything up 5 times and still getting different results, and hoping that the CRA can read your chicken scrawl. Present day tax software not only guides you through every step of the process, it also helps to optimize your allocations thereby reducing your taxes payable. There is however at least one downside to automation: Since we are more removed from the actual calculations, our understanding of our tax situation is somewhat diminished. We have an idea of what we expect to pay, which we can see every week on our paycheques (or for self employed individuals, the breathtaking moment when we see the final result on our tax return), but often we are not really sure how these amounts are derived. Below is a discussion of the tax rates, deductions and maximums to improve our comprehension of this somewhat complex topic:Read More
When you are self-employed, you are essentially taking on the role of employer and employee. As such self-employed individuals are required to remit both portions of the CPP or QPP to Federal or Quebec respectively, which is calculated on your earnings for the year. This only applies to unincorporated business as if you are an incorporated business, you are an employee of the corporation regardless of whether or not you own the business.
The QPP rates for 2011 for self-employed persons is 9.90% of your net business/self-employed income for the year. The maximum amount payable for 2011 is $4.435.20, which means that if you earn more than $48,300 of net business income, your QPP will remain $4,435.20 and there is a basic exemption of $3,500 i.e. if you earn less than $3,500 you do not have to pay QPP.
EXAMPLE #1: Income is less than maximum