I was 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 opportunity 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.
Tim Cestnick