Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
Okay, so you think you have a great business idea. Self-employment, even part-time, might be in your future. Just beware that not all business ideas are so great.
Consider the idea of Bic perfume. Bic tried it in 1988, but no one wanted it. The whole idea of perfume coming from a lighter container just doesn't work. Who wants to smell like butane?
Or consider the concept of Pepsi AM, which was introduced in 1989. The drink contained more caffeine than regular Pepsi, and was marketed as a replacement for coffee in the morning. It flopped.
Then there was Chilly Bang! Bang! juice. Also introduced in 1989, it was juice that came in a pistol-shaped package. Kids had to put the barrel in their mouths to drink the stuff. Parents weren't exactly keen on the concept.
So, your business idea has to be a good idea. Once you have that covered off, you should know there are some big tax benefits to self-employment. And you don't have to give up your day job to create tax savings for yourself. Let me explain.
If you are reporting any type of self-employment activity on your tax return (use Form T2125), you'll be entitled to claim a deduction for any costs that were incurred for the purpose of earning income from your business, as long as the amounts are reasonable. Consider the following types of expenses:
Home office expenses: You can claim a deduction for maintaining a home office if you meet one of these tests: (1) your home office is your principal place of business (meaning you spend at least half of your working hours in that office), or (2) your home office is used exclusively for business purposes and is used on a regular and continuous basis for meeting clients, customers or patients.
You can't create or increase a loss from your self-employment when deducting home office expenses. But you're paying these costs anyway (mortgage interest, property taxes, utilities, maintenance and repairs, landscaping, insurance, rent), so why not claim a deduction for them?
You'll have to prorate these expenses based on the square footage of your home office as a percentage of the dwelling's total square footage. In addition, if you use that space, say, 40 per cent of the time for business, you have to prorate those costs based on the time you use the office for business.
Say your home office represents 20 per cent of the house's square footage, and you use that space 40 per cent of the time for your business. If your total home office expenses amount to $10,000, you'd be able to claim $800 in expenses against your business income ($10,000 x 20 per cent x 40 per cent).
Make sure you don't claim capital cost allowance (CCA) on your home if you hope to sell the place completely tax-free some day. You can jeopardize part of your principal residence exemption if you claim CCA on a portion of your home.
Meals and entertainment: You can claim 50 per cent of any meals and entertainment costs. Sorry, but the taxman won't allow a deduction for golf green fees or club memberships. Take a client with you when you dine out and make the meal partly deductible.
Capital assets: The cost of any equipment you use in your business, including things in your home, can be deducted over time through the CCA system. This includes items such as your vehicle, desks, chairs, filing cabinets, computers, cellphones or PDAs, fax machines and computer software. A CCA deduction for these types of assets can really help to defray your tax bill, and might even create a loss from your business for the year. A loss can be applied against other sources of income you might have, which could save you tax (see my article from last week on this).
Convention expenses: Want to deduct part of a trip somewhere? Attend a convention and make the trip partly deductible. You can deduct costs for up to two conventions annually. The convention must be held within the geographic limits of where the sponsor of the event usually carries on business.
Other expenses: Consider also deducting a portion of accounting fees, premiums for private health-care plans, membership dues, salaries paid to family or others, supplies (including cellphone air time and long-distance fees), travel, insurance and vehicle costs (a topic for next week).