It's tax time, and if you're the average Canadian, you're in the middle of preparing your tax return for 2001. And for most, it's not a pretty sight.
I'm not talking about the reams of paper strewn over your desk or the pile of receipts that you've yet to add up.
I'm talking about the number of blank spaces showing up between lines 206 and 256 of your tax return. Those are the lines where your deductions are reported.
Today, I want to discuss the last great Canadian tax shelter: Full- or part-time self-employment.
The most significant benefit of self-employment is simply this: Deductions. You see, you're entitled to a deduction for any costs incurred for the purpose of earning income from your business, as long as the cost is reasonable in amount. In addition, self-employment can open the door to income-splitting opportunities, which could save you a bundle where you have a spouse or kids who are able and willing to work in the business.
Let's cut to the chase. Self-employment, full-time or part-time, can provide the ability to deduct certain costs that you're likely incurring already, including the following.
Home office expenses.
You'll be entitled to claim home office expenses where your home is your principal place of business, or where you use a specific area of your home exclusively for earning income from your business and you meet clients there on a regular basis. You'll be able to deduct a portion, based on the percentage of your home used in the business, of many home costs, including: Rent, mortgage interest, property taxes, utilities, repairs and maintenance, home insurance, landscaping and snow plowing.
Say, for example, that you've set aside 250 square feet of your home as an office and your home is 2,500 square feet in total. In this case, you'd be able to deduct 10 per cent of all your home office costs.
Meals and entertainment.
Why not turn some of your meals and entertainment costs into tax deductions? Where you incur these costs for business purposes, you'll be able to deduct 50 per cent of those costs against your business income.
Be sure to track the kilometres you drive for business. You'll be able to deduct a portion, based on the percentage of your kilometres driven for business purposes, of all your automobile costs, including: Gasoline, oil, repairs, insurance, licence fees, cleaning, auto club dues, capital cost allowance (depreciation) on the first $30,000 (plus sales taxes) of your car's cost, interest costs on a car loan (up to $300 a month for 2001), and lease costs (up to $800 a month plus sales taxes for 2001).
Be sure to keep a travel log to support your business mileage. And, if you can pull it off, you might consider using your old jalopy in the business instead of your new car since you can expect more repairs on the jalopy, and they'll be a deductible expense.
Capital cost allowance (CCA).
You'll be able to claim a deduction for CCA (depreciation) on all kinds of assets, including: Your car, computer equipment, software, furniture, and your home. But a word of warning: Claiming CCA on your home is not usually recommended because this could jeopardize your principal residence exemption and a tax-free sale of the home later.
Salaries or wages to family.
You'll be entitled to claim a deduction from business income for any reasonable salaries or wages paid to family members.
Provided your family members have a lower effective tax rate than your business, you'll save taxes as a family.
What's a reasonable salary? The amounts paid to family members should be about the same that you would pay an unrelated third party for the same work.
Next column I'll talk about your business structure and traps to avoid.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2002 and Winning the Estate Planning Game. He is managing director, Tax Smart Services, at AIC Ltd.
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