There are many tax advantages for self-employed
Canadians who work from home and hire family
members in their business.
The December holiday season is a time for home and
family. This year, if you are self-employed, you may
want to consider incorporating home and family into
your business to create tax benefits for both the business
and the family. Consider the following opportunities
to reduce your taxable income and thus increase
the amount of money left over to support your family.
Individuals in a 40% tax bracket
save $40 on every $100 spent.
Hiring Family Members
If your business needs employees, why not hire your
children or your spouse? Of course, the job must
correspond to their abilities and the pay be reasonable
in terms of the going market rate for such skills. It
is usually more beneficial for a sole proprietor to pay
family members rather than a third party for the
same work. Suppose, for example, you pay one of your
children or your spouse $5,000 per year for performing
a task and they have no other income. Because the
$5,000 is less than their personal exemption ($11,327
for 2015) they will not have to pay any income tax on
the earned amount. Further, the payment is deductible
from your self-employed income. If, as sole proprietor,
you are in a 40% tax bracket, the $5,000 paid to
the family member effectively saves $2,000 on your
self-employed income while providing $5,000 of taxfree
income to the family member.
If, for example, you are paying $5,000 per year for
your child’s tuition and the child was not paid from
your business, you are effectively paying in after-tax
dollars. That means you will have to earn $8,350
(40% of $8,350 = $3,340) in order to clear the $5,000
($8,350 – $3,340 = $5,010) needed to pay for your
You are allowed to deduct at-home expenses if you
meet one of the following conditions:
- You do more than 50% of your work at home.
- The work space is used only to earn income and
for meeting customers or clients.
deduct at-home expenses if you are just using your
kitchen table to do the work.
Home Maintenance Expenses
You can write off a portion of your home maintenance
expenses such as heating, home insurance, electricity
and cleaning supplies. A percentage of property taxes
and mortgage interest can also be deducted.
Capital Cost Allowance
CRA also allows the deduction of a percentage of
the capital cost allowance on the cost of the house
or outbuildings. However, since there are tax consequences
after the principal residence is sold, discuss
this option with your CPA tax advisor before claiming
The method of determining the percentage of allowable
write-off must be determined on the basis of the space
used by each particular business. Some sole proprietorships
may only need a 10 x 10 office to conduct their
business; others may need a larger office or perhaps
even outbuildings for additional office space or storage.
The most common calculation method, however, is to
take the square footage of used space as a percentage of
the total usable space.
If, for instance, profit before the application of home
expenses was $7,000 and the at-home expenses were
$8,000, you cannot claim a $1,000 loss. Your taxable
income from the business will be nil but the $1,000
that was not applied can be carried forward to the
following taxation year and applied against that year’s
income. If your business has a loss of $8,000, you
cannot increase the loss by the application of at-home
expenses. These losses would be carried forward from
year to year as well.
To claim business expenses, retain all receipts.
The expenses listed below are normally common to
all businesses. In order to claim any of these, however,
make sure they are incurred to earn income and that
all receipts are retained:
- accounting and legal fees
- advertising expenses
- business taxes, fees, licences and dues
- insurance expenses
- interest and bank charges
- maintenance and repairs
- meals and entertainment
- office expenses
- salaries, including employer’s contributions
- motor vehicle expenses
There may be limitations to deductibility within each
category. Seek the advice of a CPA tax advisor before
making any claims.
Interest on credit card balances incurred for business
expenses is deductible. But, if business purchases
are made with a personal credit card, the CRA will
most likely disallow the interest expense because the
interest applicable to outstanding business balances
cannot be separated from the interest charged on
Business Bank Accounts and Business
Business bank accounts allow bank charges to be easily
identified as business expenses; deposits and withdrawals
can be more readily traced back to suppliers,
customers or owner’s withdrawals or contributions.
Separating business accounts from personal accounts
minimizes the confusion when processing year-end tax
information or when preparing for a CRA audit.
Loan interest for vehicles and equipment is also a
deductible expense. Make sure the transaction is transparent
so you can establish that the principal went into
a business bank account. If the loan is from relatives,
make sure proper documentation establishes the date
of the loan, the interest rate and the repayment terms.
Should you need to increase your mortgage to provide
operational funds for the business, separate clearly in
your records the mortgage for the principal residence
from the funds for your business. The date the additional
funds are deposited into the business account
establishes the break. Your CPA tax advisor will thus
be able to calculate separately the loan interest attributable
to the business and that attributable to your
Limitations of Do It Yourself Software
Certainly you may choose to complete your tax return
by yourself. “Do it yourself” software can tell you how
to fill in the blanks and can do the calculations accurately;
however, it cannot analyze the data to determine
whether it has been entered correctly or whether
you have obtained the maximum tax benefit. Hiring
a CPA tax advisor will be your best tax deductible
expenditure. Not only will your CPA ensure accurate
tax results, but also suggest additional measures you
should make this year and in future years to minimize
your income tax liability.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.