The five home busi­ness myths that could rob you of tax sav­ings

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - TIM CESTNICK

Iwas sit­ting down for a chat this week with my neigh­bour, Paul. “Paul, how’s that new busi­ness com­ing along that you were plan­ning to start?” I asked.

“I haven’t ac­tu­ally started it yet, Tim,” he said. “But Paul, I thought you had vi­sions of sell­ing ba­con-flavoured tooth­picks and gum world­wide. What hap­pened?”

“I think it’s go­ing to be a lot of work. I know you told me about the tax ben­e­fits of a small busi­ness, but I’ve been talk­ing to some other peo­ple who have said they don’t think it’s worth the has­sle.”

Paul fell vic­tim to some myths that I’ve heard oth­ers ex­press when it comes to home-based busi­nesses.

Let’s de­bunk these myths. There’s still time in 2018 to save taxes if you’ve been think­ing of get­ting into busi­ness for your­self.

Myth 1: It’s too much work start­ing a busi­ness. Not so in most cases. Your busi­ness doesn’t have to be full-time; make it as part-time as you’d like. You don’t need to in­cor­po­rate your busi­ness (in fact, it makes sense not to in­cor­po­rate un­til your busi­ness has grown in prof­itabil­ity since any losses early on can off­set other in­come on your per­sonal tax re­turn). Your car doesn’t have to be in your busi­ness’s name to be al­lowed ve­hi­cle de­duc­tions, you don’t have to reg­is­ter for and charge GST/HST un­til you’re earn­ing more than $30,000 in tax­able sales, and you don’t need any li­cences or per­mits be­fore you can claim tax de­duc­tions.

Myth 2: I won’t have many ex­penses to deduct any­way. Hog­wash. You have to be a lit­tle cre­ative here – in a per­fectly le­gal way, that is. Some every­day costs could be­come fully or par­tially de­ductible such as: tu­ition for job-re­lated ed­u­ca­tion, busi­ness-re­lated travel and en­ter­tain­ment, ve­hi­cle costs, home of­fice costs, de­pre­ci­a­tion on as­sets be­ing used in the busi­ness and any other rea­son­able costs in­curred for the pur­pose of earn­ing in­come from your busi­ness (with a few lim­i­ta­tions).

Myth 3: I can’t claim ex­penses if I don’t earn rev­enue. Not true. As long as you’re car­ry­ing on an ac­tiv­ity in a com­mer­cial man­ner, and not merely as a hobby, you’ll be en­ti­tled to claim ex­penses whether you’ve earned rev­enue or not. So, es­tab­lish and mar­ket your busi­ness be­fore year-end to claim all types of start-up costs in 2018. If your ex­penses are greater than your rev­enue for 2018, you should be al­lowed to ap­ply the loss against other types of in­come on your 2018 tax re­turn.

Keep in mind, you can’t cre­ate or in­crease a loss with home of­fice ex­penses (in­sur­ance, prop­erty taxes, mort­gage in­ter­est, util­i­ties, etc.); any ex­cess home of­fice ex­penses can be car­ried for­ward for claim­ing in a fu­ture year when you be­come prof­itable.

Myth 4: Prov­ing that I have a real busi­ness will be tough. You can’t carry on a hobby and ex­pect to claim de­duc­tions – but you can still have a pas­sion for the busi­ness you’re in. And prov­ing that it’s a com­mer­cial ac­tiv­ity is not com­pli­cated: Talk reg­u­larly with po­ten­tial or ac­tual cus­tomers and main­tain a list of those con­tacts and meet­ing dates; show that you’re hold­ing out your prod­uct or ser­vice as be­ing avail­able to the pub­lic; open a sep­a­rate bank ac­count (a per­sonal ac­count will do; but keep it sep­a­rate from your other ac­counts); keep good records of your in­come and ex­penses; op­er­ate in a pro­fes­sional man­ner (have busi­ness cards, a web­site, brochures, fly­ers, etc.); and cre­ate a busi­ness plan and fi­nan­cial pro­jec­tions show­ing that you can earn a profit even­tu­ally.

Myth 5: The rules around pay­ing fam­ily have changed. Some peo­ple think that the “in­come sprin­kling” rules in­tro­duced by the fed­eral govern­ment this year shut down any op­por- tu­nity to pay fam­ily. Not true. While it’s true that pay­ing div­i­dends and cer­tain other ben­e­fits out of pri­vate cor­po­ra­tions to cer­tain fam­ily mem­bers has been made more dif­fi­cult, pay­ing salaries and wages has not been af­fected.

Make sure your spouse and kids are do­ing the work they’re be­ing paid for and that you pay them a rea­son­able amount, and you’ll be good to go.

This com­pen­sa­tion will cre­ate earned in­come for your spouse or kids, which will pro­vide RRSP con­tri­bu­tion room, and will al­low you to deduct amounts that can be used by your spouse or kids for tu­ition, travel, or what­ever else you might nor­mally pay for.

If your spouse or child’s tax­able in­come is un­der $11,809 in 2018 then he or she will pay no tax on any in­come re­ported.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an au­thor, and co-founder and CEO of Our Fam­ily Of­fice Inc. He can be reached at tim@our­fam­i­ly­of­fice.ca.

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