Become a business. A business is an activity having a reasonable expectation of making a profit. If you are engaged in activities designed to earn money, then you are a business. You do not have to be registered to be a business; you just have to be doing the things that businesses do.

If you are not incorporated, be a business with a social insurance number. If you are not incorporated, do not file two tax returns. As a business, you are a self employed individual with all the advantages and disadvantages that this involves. As a small non incorporated business, if you file two tax returns, you will be paying too much tax.

As an employee, "The Company" did all your income accounting for you and gave you a T-4 at the end of the year for your tax reporting. Now, as a business, you need to do this for yourself, or to have the right accountant do it for you. There are many bonuses involved in running your own business. As a business, some of the things which were expenses paid for with after tax income may now be shared with the business and become tax deductible. You have both an obligation and opportunity to properly account for your revenues and expenses. The better you become at record keeping the better your justification in keeping your deductions.

If you want to know what can be written off, just ask yourself “If this was General Motor’s, would they be able to write if off?” and therein lies your answer.  You also have an opportunity when you start a business, to plan and select the best tax scenario for yourself. Take full advantage of it. Summarize and analyze your costs regularly.

Businesses have business expenses that are tax deducible. People pay the maximum tax and businesses pay the minimum tax. Your salary is one source of income. Your side job is a second source of income. Your total income less expenses and tax already paid equals your taxable income. Remember you can not write off business expenses against salaried income, but you can write them off against your total income.

You must have a reasonable expectation of making a profit to qualify, as a business in CRA's eyes. You don't have to be a going concern, just a credible venture with a reasonable expectation of turning a profit.  Begin your small business as a sole proprietorship. That is the easiest type of business to create. A partnership is almost the same as a sole proprietorship except that you put both names on the business registration form.

A partnership can be you and your spouse doing business in your own home, full or part time. Most part time businesses operating from home should start as sole proprietorships. The cost of incorporating and the paperwork involved with it are not worth the cost in the beginning of most businesses.  In fact, if you anticipate initial business losses, incorporating could actually be to your disadvantage, as the tax losses of your corporation cannot be written off against your total personal income.  As your business grows and becomes profitable, you may then want to consider incorporation. In the meantime, an inexpensive small business liability policy can protect you from personal liability.

Starting a business as a sole proprietorship, or partnership usually involves a simple registration form and fee ($80.00 in Ontario) at your local records office. Contact your provincial government switchboard for the office nearest you. Then you have to open a current (business) bank account. The bank will insist that you fill out a credit application form. This procedure is not done for the benefit of the bank; rather it is done for the benefit of the tax department. Why would a bank want a credit application for you to deposit money? If you don’t intend to use a name other than your own, you are better off not registering your business. Just open up a chequing account under your personal name, this is a lot cheaper to operate and is acceptable for small business purposes.

If you wish to use a name other than your own for business purposes, you would have to register your business name, and do all the extra required paper work. Registering your name is so that people and businesses can find you.  You don’t have to be incorporated or even registered to be a business and use your own name. Registering a name other than your personal name is required in some provinces under the Business Names Act so that people and businesses can find you.

Not registering a new business avoids the registration fee (a form of tax).  Registering a business name does not protect you from others using the same name. It is up to the name owners to protect their own names and trademarks.  Not incorporating avoids another $300.00 in government fees, not to mention legal expenses and incidentals. You can always register or incorporate later when your income is high enough to benefit from restructuring your tax position. Incorporation will be dealt with in more detail later in this workbook.

When filling out a business registration form, you will be asked to specify what name you wish to run your business under. Note that simply filling out the form does not protect your business name. For example, running a business out of your home under names such as Petrocan or Burger King might cause you problems later on with the legal owners of those names!

If you are a business, you will now have to use December 31 as your year end. We used to be able to have any date that was good for us. However, the tax department found that it was better for them to have us all use the same date as our fiscal year end.

This is an example of a hidden tax increase that is sign of the future direction of taxation.

A little at a time, the tax department keeps chipping away at our opportunities to reduce taxes through tax planning.  Revenues and expenses of a business are earned and incurred in the year on which the last day of the fiscal period falls. Therefore, when you can, you should plan for which year to have major expenses fall in.  The business starts when you start to expend funds to earn income for businesses. For corporations, the incorporation date determines the start date of the incorporated business. The actual date of the first income transaction may be much later than the business start date.

Registration of a name may also be done much later. You can register a numbered company. Don’t ever accept the tax department’s argument that you are not a business unless you have earned income. I’m not sure if they believe what they are saying, however it is important for you to understand when and when not, that you qualify as a business.

When you are operating a business, sideline or otherwise, and the business has more expenses than income, don't show "0" income. Instead, show a loss, which is negative income. This allows you to reduce future taxes over the next seven years or even better, to recover over paid tax from the past seven years. You can carry losses forward and backward for seven years.

Your total income is composed of employment income, business income, interest income, grossed up dividends, taxable capital gains, withdrawals from RRSP’s, etc. To arrive at total taxable income, you must subtract certain tax deductions, such as alimony payments, moving expenses, child care expenses, legal fees, and RRSP contributions, etc.

Once taxable income has been determined, you can calculate federal tax owing by consulting tax tables. Then subtract various non refundable tax credits, personal and dependant credits, old age credits, disability credits, charitable donations, and medical expenses, etc.

These deductions reduce your taxable income, which is used to calculate taxes owed.

A $100 write off, for example, could be worth anywhere from $27 to $53 in tax savings.

A tax credit is a direct reduction in tax. A $100 tax credit is worth a $100 in tax savings.

Everyone gets a federal tax credit of $1,098, which offsets the first $6,456 of taxable income.

If your spouse's income is less than $538, you may claim an additional tax credit of $915. This is reduced if your spouse has income between $539 and $5920.

If you are separated and support a family member in your home, you may claim that family member under the "equivalent to married" tax credit.  Make interest deductible as a business expense. Tax deductions for interest are possible when you treat interest paid as a business and not as a personal expense.

Business interest is deductible. Consumer or personal interest is not.  When you borrow money to purchase an automobile, video recorder, computer or other asset for business use, even if it’s only for part time use in your business, the business interest portion (i.e., the % of interest matching the % of time the asset is used for business) can be deducted. Your small business, once again, creates deductions out of previously non deductible expenses.

When investing your money in your business, it's important to look at how the money is invested, and for what purpose. If the money is invested directly into the business, for operating expenses, it is not treated as income. However if the money is then invested in things such as Treasury bills, and not paid back within a year, then it is treated as "passive income" and is taxed at 34% avoidance rate. If there is risk involved, i.e., a new marketing scheme, the applied tax rate is "0"%. 

It's really simple if you want to have the tax advantages of a small business, just be a business. Think like a business, and pay taxes like a business. The better you practice business skills the less money will go to the tax department. Always keep all receipts whether you think you can write them off or not. It’s a matter of making a good habit of collecting receipts. You remove the non eligible receipts at the end of the year. This way you will not miss any deductions because of a bad memory, nor because you did not realize it was a legitimate business expense at the time.

Begin marketing now to make business start up costs deductible. Expenses incurred after the starting date of your business are fully deductible in the year you accrue the expense. Accrual accounting means that simply owing the money is sufficient to allow its deduction where applicable, at the time the invoice was issued. GST accounting, for example, works the same way. The tax is calculated and due at the time of billing. As far as capital purchases go, you are limited to half of the allowable capital cost expense in the first year. The unclaimed half is written off in later years.

With this in mind, you should begin documenting business plans, expenses to earn money, and marketing your product or service immediately to establish the starting date of your business. Canadian tax law does require you to claim expenses you prepay in the year(s) in which you occur them. However, you can carry losses forward for seven years.

WNBC For additional information contact salesmanager@wnbc.net   www.wnbc.net

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