Watch this short interview with Allan Madan on small business deductions. Allan shares the best 5 tax deductions for small business owners with Mike, host of BNN, a leading Canadian business news agency. Interviewer: This is the last day of our tax special. You still have until April 30th to file yours. Joining us now for some tax tips for the self-employed is Allan Madan, a charted accountant and tax expert at Madan Charted Accountant. Good to have you with us again.
Madan: Thanks Mike. Thanks for having me.
Interviewer: Let’s talk about declaring a bonus for you. What is the tax benefit if you are self-employed of doing that?
Madan: It’s a very good question. Having your company declare a bonus has two big advantages. Number one, the company can claim a deduction for the bonus payable, even though it’s not paid. Number two, you don’t have to include the bonus in your income until you receive it (i.e. when it’s paid to you).
Interviewer: I am not quite sure what that means.
Madan: Well, look at it this way. Let’s say your company is earning $100,000 and you want to pay a bonus of $50,000 to reduce your company’s taxable income. The company could declare a bonus that is payable to you, as the owner, and you would not include the $50,000 in your income until the company pays the bonus to you. So in essence your company is getting a tax deduction now for the bonus payable and is deferring the payment of tax.
Interviewer: You say you might not have to pay it at all. Is that correct?
Madan: Well no, your company does have to pay the bonus eventually. There is a six month stipulation, so within six months the bonus must be paid out. So it is a six month tax deferral.
Interviewer: What about non cash gifts to employees?
Madan: You know what, I get asked that question lots of times. Non cash gifts up to $ 500 per employee are allowed in the year. Non cash gifts don’t include cash or gift cards. Non-cash gifts should be given on a special occasion to employees like a birthday, anniversary and so forth.
Interviewer: Why is that relevant? Does the CRA says, wait a minute, it wasn’t that employees birthday?
Madan: Exactly right. They want to make sure that you are not trying to circumvent payroll taxes. Because the non-cash gift is in fact tax free to an employee. So there must be some sort of special purpose.
Interviewer: That’s a very interesting point too about a gift card. One might think oh I can go off to the local store to buy a gift card. That counts as cash?
Madan: It does. It’s no different than giving them $500 in cash.
Interviewer: What about reducing health or dental costs?
Madan: Good question. A lot of small business owners are required to have health and dental benefits but don’t have the privilege of working for a fortune 500 company. So what they can do is purchase health and dental premiums and get that paid directly through their company. It’s not a taxable benefit to them and the only catch is if you have other employees you must extend the same benefits that you are getting to your other employees as well.
Interviewer: Equal on a level playing field?
Madan: Equal on a level playing field. So you can get the super deluxe AMG BMW package where you give your poor fellow the Ford Pinto.
Interviewer: okay so no screwed routines here.
Madan: No, none.
Interviewer: What about bringing in an apprentice or a co-op student?
Madan: That’s a good question. There are lots of young and capable people out there who need an opportunity and the government has created an incentive whereby if you hire a co-op or an apprentice you can receive a tax credit of up to 10% of the salaries paid to them. So, it’s a win-win situation both for the young person and the employer.
Interviewer: We find ourselves at a lot of conventions here at the Business News Network and there is a tax benefit associated with that. How do I go about as a self-employed individual to claiming all those?
Madan: You know as any business owner you have to be on top of your business. So it’s important that you do attend conventions. The government has stipulated that you can attend a maximum of two conventions per year and receive a tax deduction for the convention costs, food and travel. Interviewer: Only two?
Madan: Only two. There has been some abuse so the CRA will allow a deduction for up to 2 conventions in a year.
Interviewer: Alright that food being subject to a 50 % limitation. If I get myself some street meat outside the metro convention centre in downtown Toronto costs me $3, I can only claim half?
Madan: Absolutely, there is a 50% limitation on food but do remember the bulk of the convention cost is the fees paid to attend the convention itself.
Interviewer: Okay what if I go across the street and have the lobster, does it matter what the total bill is?
Madan: Well it has to be reasonable in the CRA’s viewpoint. Are you attending a five star restaurant with a huge bill? You have to conduct yourself in a fair and responsible manner.
Interviewer: SO how do you establish what is fair and appropriate because if you are wining and dining a big potential client you are going to want to take them to the lobster shop.
Madan: Absolutely, it’s a question of fact. There is no hard and fast rule and so the CRA examines this on a case by case basis.
Interviewer: Allan great having you and thank you so much.
Madan: Thanks again Mike.
Interviewer: Allan Madan, Chartered Accountant and Tax expert at Madan Chartered Accountant.
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