- To maximize your tax savings, it is important to know when your business began. It can be months after this startup date before sales finally start happening.
- There are no hard and fast rules on when a business starts. The beginning date is very much dependent on the facts of each particular case. A business is considered to begin whenever some significant activity is started which is important for the operation of the business. For example, a business may be considered to have started when you begin applying for a license necessary to operate your business, or when you make your first purchase of supplies or products to sell.
- Be sure to record all business related expenses between startup and your first sale.
- Don’t spend money on your business before your official startup date.
- Any business expense made before the start of a business will not be tax deductible. So before you incur significant costs relating to your business, perform some event which will signify the beginning of your operation. This event may be the registering of your business name with the province or the Chamber of Commerce, or opening up a separate bank account. Whatever it is, do some thing that signifies the start of operations.
THE 3 COMMON BUSINESS STRUCTURES:
The Income Tax Act defines many complex forms of business structures. However, there are three business structures that are common and widely used by small and home-based businesses: sole proprietorship, partnership and the corporation. Knowing which structure is appropriate for you can save you time and money.
WHAT IS A SOLE PROPRIETORSHIP?
When an individual operates a business and includes the profit or loss of that business on their personal tax return, they are typically considered to be operating as a sole proprietor. There are three characteristics of a sole proprietorship:
- a single individual owns the business,
- the business is in the individual’s name or trade name
- the profits and losses of the business are reported on the individual’s personal tax return.
WHAT ARE THE ADVANTAGES OF A SOLE PROPRIETORSHIP?
The main advantage of a sole proprietorship is the ease of getting started. It can cost little or nothing to start a business as a sole proprietor. And you can start the business immediately. It can be as simple as just starting to keep receipts or opening a bank account. You can register your business name if you wish to use a trade name like “Joe’s Garage” or you can just operate as “Joe’s” without registering your business name.
Another benefit with this structure is very little government regulation. With a corporation you must operate within the regulations of the Canadian Business Corporations Act or the provincial equivalent. A partnership is subject to more tax rules and filing requirements than a sole proprietorship which provides the least government regulation.
Another important benefit of a sole proprietorship is that all of the profits of the business go to the owner. The other side of this is that all those losses also go to the owner, which means that you are not sharing either the gains or the risks of ownership with anyone.
WHAT ARE THE DISADVANTAGES OF A SOLE PROPRIETORSHIP?
The main disadvantage of a sole proprietorship is unlimited liability. Unlimited liability means that you will be personally responsible for all debts and obligations of the business. If your business goes under, you may have to sell personal assets in order to cover the debts of the business.
Another disadvantage of a sole proprietorship is that once the owner passes away or loses interest in the business, the business ceases to operate. With a corporation, the business can live on despite the fact that the owner of the shares retires or dies.
All entrepreneurs want to deduct the costs of operating an automobile used in their business. Deducting automobile costs is very important. It is one of the more complex areas for small businesses, with many rules and restrictions. Knowing these rules and planning your affairs accordingly can provide you with significant tax savings.
WHAT AUTOMOBILE EXPENSES CAN I DEDUCT?
You can deduct any expense incurred to operate your vehicle, the maintenance and repairs to keep the vehicle on the road, the license and registration fees, the insurance costs, leasing costs or capital cost allowance, and interest costs if you purchase the vehicle.
If you use your vehicle strictly for business purposes, you will be eligible to deduct 100% of the motor vehicle expenses. In many cases the vehicle is used for both business and personal use. In this case, you are eligible to deduct only those automobile expenses that relate to the business. To determine how much of an expense is eligible to be deducted, divide your total business kilometers in a year by the total kilometers driven and multiply this by your automobile expenses. For example:
$5,000 (total expenses for year) x
[18,000 (business kilometers) / 25,000 (total kilometers)]
To ensure that you can obtain the maximum tax deduction for your vehicle, make sure you keep all receipts to support your automobile expenses and that you keep some sort of log or record of your business kilometers. If you are challenged on your tax deductions, it is up to you to prove that your deduction is reasonable.
Keep a log for all of your business trips, which include the date of the trip, destination, purpose and number of kms driven. Unfortunately, not everyone is disciplined enough to keep such a log. What happens is that you forget business kms and don’t claim them or Rev. Can. reduces your claim since there is no support for the business kms. If keeping a mileage log has been tried and failed numerous times like most business persons I know, see our Products section for the mileage log that finally worked for me.
The odometer reading is important to calculate the overall kms driven in your business’ fiscal year. Be sure to record odometer readings regularly, especially at the start and end dates of your fiscal year.
As a self employed owner of a business, you are not allowed to simply take a per kilometer charge and receipts relating to your automobile and deduct the actual cost. The per kilometer allowance is reserved for your employees if you reimburse them for auto expenses incurred on business. As an owner of your sole proprietorship, you cannot be considered an employee and would therefore not be eligible for a per-kilometer allowance.
WHAT IS CONSIDERED “BUSINESS TRAVEL”?
Traveling on business includes any reasonable traveling you conduct to and from your customer’s place of business or in the performance of your business. This includes traveling to the store to a different city to purchase business supplies, traveling to meet a client to conduct business, or traveling to and from a business conference or course.
If you have an office away from your home, traveling to and from your office would not be considered business traveling. This is personal. If your office is at home and a client provides you an office on a temporary basis to conduct business, traveling back and forth to that office would usually be considered business traveling.
If you do have an office away from your home, a legitimate way to increase your business kms is to schedule meetings with clients on the way to and from work. This will turn a nondeductible personal trip into a fully deductible business trip.
Not all, but a portion!
You need to set up a dedicated room in your house for your business. Then determine the percentage of your home’s floor space that you’re dedicating to doing your business, and deduct from your income that percentage of your total hydro, utilities, mortgage interest, home insurance and property taxes. For example if you live in an 1,200 square foot house and use 250 square feet for your business, you can deduct 21% of your rent or mortgage interest and any other costs related to the home.
Remember that your office expenses can only be used to bring your home-based business income down to zero, though the remainder can be carried over for deductions against business income in any future year.
In many cases it is obvious that you are self-employed: you have several different customers, you are your own boss, you supply your own tools, and you have the risk of losing money.
You may already have thought of re-negotiating your current employment situation to become self-employed. This is an excellent tax $ saving tool for both the former employer & employee. But do it correctly.
The distinction between being an employee and being self-employed is based on the following four “tests”:
- The control test.
- The integration or organization test.
- The economic reality test.
- The specific results test.
The Control Test:
If one person holds considerable control over you, in the way of deciding what you do, how you do it, when you do it, and where you do it, then they may be considered to be your employer. If, on the other hand, you have liberty to perform tasks as you choose, provided it is done within an agreed upon time, then you may pass this test.
The Integration or Organization Test:
This test looks at whether or not you become an integral part of an organization. If your work is closely tied to your customer’s business that you act like any other employee, then you may also be considered to be an employee.
The Economic Reality Test:
This is often the most clear-cut test. It looks at whether or not you own your own tools, have a chance to make a profit, or could be at risk of a loss. Where an individual supplies no funds or tools, takes no financial risks and has no liability, the courts have considered the relationship to be employee and employer.
The Specific Results Test:
This last test looks at whether or not you are performing a specific task with a distinct completion or whether your services are provided over an extended time frame, with no specific result contemplated. An employee is typically hired to perform various tasks as required on an ongoing basis. A self-employed person would be hired to perform a specific task, the completion of which would end the relationship.