Posts Tagged ‘Taxation’

If you run a business out of your home, what can you claim?

By the tax analysts from the TurboTax Business Incorporated and Unincorporated team www.turbotax.ca

The economic downturn had a big upside for many Canadians: they turned a corporate downsizing into a positive next career step by joining the legion of Canadians running full and part-time businesses out of their home. Home office expenses (also referred to as Business-use-of-home expenses) can be a valuable tax-saving opportunity for self-employed Canadian taxpayers.

The Canada Revenue Agency (CRA) states that you can deduct expenses for the business use of workspace in your home, as long as you meet one of the following conditions:

  • It’s your principal place of business; or
  • You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet clients, customers or patients.

What can you deduct? The following expenses are eligible for business-use-of-home expenses:

  •  Maintenance costs, such as heating, hydro, electricity and water
  • Home insurance
  • Cleaning materials
  • Rent
  • Property taxes
  • Mortgage interest
  • Routine maintenance and incidental repairs 

Business-specific tax software like TurboTax Home and Business will automatically check to see if these and hundreds of other federal and provincial deductions apply to your tax situation.

Some important details

Only the portion of your home used for business can be claimed, which means only a portion of the overall expenses mentioned above. How do you determine the portion? It depends on whether you use the space for personal use, as well. If you have an office in your home for business purposes and it is solely used for business purposes, then your percentage is calculated by the area of the workspace divided by the total area of your home. That will give you the percentage of the total rent (for example) you can deduct.

It’s a bit more complicated if the space is used for business and personal. If you use your designated work space for personal use, you’ll need to further pro-rate your business-use-of-home expenses. You can do this by calculating how many hours in the day you use the rooms for your business, and then divide that amount by 24 hours. Multiply the result by the business part of your total home expenses. This will give you the household cost you can deduct. Additionally, if you run the business for only part of the week or year, reduce your claim accordingly.

One more important point. The amount you deduct for business-use-of-home expenses can’t be more than your net income from the business before you deduct these expenses. In other words, you can’t use these expenses to increase or create a business loss. That said, the portion of the otherwise deductible expenses related to a workspace you can’t deduct in a taxation year can be carried forward to the next year. This carry-forward is indefinite, provided you continue to use this space for business-use-of-home on a continuous basis.

One watch-out

Capital cost allowance (CCA) is another eligible business-use-of-home expense, but accounting professionals generally don’t recommend you take advantage of the opportunity to claim CCA, as this deduction is subject to capital gains and recapture rules. This may result in removing the tax exempt status of a portion of your home as a principal residence. Basically, this means that you will have to pay capital gains on the depreciated portion of your home when you sell it. 

Tax tips brought to you by tax analysts from the TurboTax Business Incorporated and Unincorporated team www.turbotax.ca

Posted by Lynnette in Small Business Tax Tips on February 23rd, 2011

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The pros and cons of incorporating vs. not incorporating your business

Brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team

One of the questions asked most frequently by entrepreneurs is, “Should I incorporate my business?” The answer to this question is usually, “That depends on your particular situation and needs.” There are potential pros and cons to be considered before choosing the best option for your business.

Benefits of incorporating include:

1. Limited liability: This means that, as a general rule, shareholders’ liability to creditors is limited to the amount invested (unless shareholders have provided personal guarantees for the corporation’s debts).  

2. Greater access to capital: It is often easier for corporations to raise money than it is for other forms of business. Financial institutions and other lending sources view loans to corporations as less risky than to other forms of enterprise.

3. Small business tax deduction: Your incorporated business may qualify for the small business deduction, which is available to all Canadian-controlled private corporations earning active business income. With the small business deduction, a corporation pays approximately 11% on its first $500,000 of taxable income.

4. Tax deferral: This applies if a shareholder does not require all income generated for personal needs, and funds—after corporate income taxes—can be redirected into the corporation, resulting in postponement of immediate taxes at the personal level. A deferral is normally achieved through Canadian Controlled Private Corporation (CCPC) with small business deduction, since the tax rate is significantly lower than the top marginal personal rate.

5. Lifetime capital gains deduction: Individuals disposing of the shares of a qualified small business corporation are eligible to claim the $750,000 lifetime capital gains deduction.   

6. Tax planning: By incorporating a business, shareholders can be remunerated with dividends, in addition to salaries and bonuses. This allows shareholders the flexibility to take advantage of the imperfections in the tax integration system, which means it is unlikely that the combined federal/provincial corporate and personal tax rates in any given province will be the same. In some situations, the total taxes paid at the combined corporate and personal level will be less when the corporation is paying dividends other than salaries or bonuses.

In some situations, incorporating your business is unnecessary. Disadvantages normally associated with incorporation include:

1. Higher start-up costs: Generally, start-up costs—fees paid for the process of incorporating, legal fees, accounting fees, etc.—are higher for incorporated businesses than sole proprietorship or partnership-type businesses.

2. Increased formalities: Normally, incorporated businesses must file certain documents such as articles of incorporation, an Annual Return, notices of any changes in the board of directors and/or the address of the registered office, and a corporation income tax return.

3. Use of losses: An individual can deduct business losses against any other source of income, including employment income and rental income. If the business is incorporated, such losses can only be deducted against past or future corporate income.

4. Personal tax credit: A corporation is not eligible to take advantage of personal tax credits, such as the basic personal, tuition and education, age, etc.

Brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team

Posted by Lynnette in Small Business Tax Tips on March 29th, 2010

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Income splitting by paying salaries to spouse and children

Brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team

A penny saved is a penny earned, as they say. “They” must have been a small business owner, because any time you can reduce costs, you improve your bottom line. When it comes to tax time, finding all your allowable deductions will help get back every penny you deserve.

Whether you are carrying on a business personally (ie. self-employment) or through a corporation, one of the most cost-effective ways to save taxes is to use a strategy called income splitting. The term ‘income splitting’ refers to a process of splitting income amongst family members (ie. spouse and/or children) to achieve a lower overall tax burden by reallocating income to be taxed in their hands.

If your spouse and/or children work for you in your business, you can achieve income splitting simply by paying them salaries. Salaries paid to them from your business are tax deductible as long as the amounts are reasonable and that the employment services are genuine. So, what’s considered a reasonable amount of salary for your spouse or children? Well, a simple question would be to ask yourself how much you would pay a third party dealing at arm’s length for the same employment services rendered.

Here are some of the pros and cons of income splitting by paying salaries to your spouse and/or children:

Pros

  • Lower overall tax burden by utilizing the lower tax rates that the spouse/children have relative to you / your business
  • Creation of earned income for future RRSP contributions for family members
  • Taking advantage of spouse’s and children’s personal tax credits which otherwise would not have been utilized by them in their own tax returns

Cons

  • Need to withhold and remit payroll taxes for the salaries paid to your spouse and children
  • Need to file additional T4 slips (Statement of Remuneration Paid) for your spouse and children
  • May lose some personal tax credits including spouse or common-law partner amount

As with any tax-saving strategy, careful consideration and planning should be given to achieve the best desired effect and to avoid any negative tax consequences. Income splitting can be complex and may require assistance from a tax professional. However, if done properly, this is an inexpensive way to help you get back every penny you deserve.

Tax tips brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team

Posted by Lynnette in Small Business Tax Tips on February 25th, 2010

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Save your business money with the technology tax write-off.

Willingly, or thanks to the recession, more than two-million Canadians are now self-employed according to Statistics Canada, making this category of employment the fastest growing in the country.

To give small businesses a tax break and boost the economy, the federal government announced in last year’s budget a huge 100% capital cost write-off on computers and related software and peripherals purchased between January 27, 2009 and February, 2011. (In the past and after the program ends, capital cost allowances for computers will return to the declining-balance rate in which you deduct the cost of your business computers by a smaller percentage each year. Additional details about the new program are here.)

The tax deduction is timely news if you need to invest in technology and it’s a great way to reduce your company’s taxable income – but you can only take advantage of it until next February, so stop by your neighbourhood STAPLES or visit online to ramp up on computer purchases you may have put off until now.

There are more smart ways to save your company money.

Remember, it’s a great idea to consult an accountant about other deductions available to you. For example, if you work where you live, you can deduct the expenses in that part of your home in full (50% in Quebec) on utilities, property taxes, home insurance, mortgage interest and condo fees or rent.

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According to Stephen Thompson, in 167 Tax Tips for Canadian Small Business 2009, you can even increase your mortgage to help finance your business startup.

“That portion of the mortgage interest that relates to the business is a business expense which you can deduct, regardless of whether or not your business is profitable.”

Know of any other smart ways to save more for your small business?

Posted by Lynnette in Small Business Tax Tips on February 18th, 2010

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