People try to make money in all kinds of ways. In May, 2002, The New York Times reported the story of Steven Olson, who was awarded a patent by the U.S. patent office to protect a method of swinging on a swing. Mr. Olson, who was five years old at the time, and his father – a patent attorney – discovered that it's possible to swing in an oval arc pattern if you pull the chain or rope of the swing in a particular manner, and kick your feet in a certain way. So, don't try this at home unless you're licensed to use the technique.
Now, you may have other, more practical, ideas about how to make money. Last week I spoke about the benefits of self-employment, and about a few specific tax deductions you may be able to claim if you're reporting self-employment activities on your tax return this year.
Today, let's talk about one more deduction, then turn our attention to some cautions about self-employment.
Running your own business, even part-time, will likely mean using your vehicle for your work.
The good news, of course, is that you can claim a tax deduction for many costs related to your vehicle if you use it in your work. Consider the cost of gas and oil, repairs and maintenance (including car washes), insurance, auto club dues, licence fees, interest on a car loan, lease costs, and depreciation (capital cost allowance) if you own the car.
You won't be able to claim a deduction for the full amount of these costs, but for a percentage. Divide the number of kilometres you drove in the year for business purposes by the total kilometres driven in the year. It's that percentage of the costs that can be deducted.
You should keep a log of the dates and places you drove for business. Here's what I do: I simply track where I drove and when, and then later use Google Maps to calculate the actual distances between my office and those work destinations (because I never remember to look at my odometer when I arrive). If you don't keep a log, you could face a problem claiming your vehicle costs later.
If you're considering full-time self-employment, there are some things to be aware of. Some of these cautions won't apply if you're simply self-employed on a part-time basis. But full-time self-employment is a different ball game. I still like the tax advantages we've talked about, but consider these issues as well:
No Employment Insurance benefits: You won't have to pay employment insurance (EI) premiums if you're self-employed, but don't count on collecting benefits either if things don't work out with the business. This might be an issue especially if you are going to take time off as a new parent and hope to collect EI during that time.
Higher Canada Pension Plan contributions: As an employee, your employer contributes, on your behalf, an amount equal to what you contribute to the CPP. If you're self-employed, you'll have to contribute both the employee and employer portions yourself.
Bookkeeping headaches: If you're self-employed you'll have to do a very good job at keeping good records to support your tax deductions and GST/HST input tax credits, and the complexity of your filings with the government will increase.
Don't underestimate this paperwork burden. You might want to hire someone part-time to help in keeping you organized if this isn't your strength.
Holidays can mean less income: If you work for yourself you'll have the flexibility to take time off when you want, but taking time off may mean earning no income during that time.
And forget about getting paid for taking statutory holidays.
Forget about tax-free benefits: As an employee you might be entitled to certain tax-free benefits such as a dental and medical plan, certain club memberships, and more. Being self-employed means paying for these things yourself.
No retirement plan: As an employee you might have participated in a company pension plan or group registered retirement savings plan. Not so if you're self-employed. You'll be on your own when saving for retirement.
Getting credit may be harder: If your income is less predictable when you become self-employed, it may become more difficult to secure financing or credit.
If you're thinking of becoming self-employed, consider securing access to these funds before giving up your employment.
Self-employment is still one of the greatest tax shelters available. But go into it with your eyes wide open before you decide to give up your day job.