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Understanding life insurance

September 24, 2019

4 important tax tips for business owners

Running your own business? Here’s a look at what you can deduct from your taxes. Plus, find tips on what else you can do to save money on taxes after you’ve claimed expenses.

Two years ago, a magazine editor asked me to write an article on Wonder Woman. My editor knew I had faithfully followed the comic since the ‘80s. The result? I got to pen a piece on a series I’ve long-loved and claim comics as a business expense.

Alexandra McQueen is a Toronto-based certified financial planner. “You could do that because you can trace the expense to a business purpose or intent,” she explains.

Filing taxes can get a little complicated when you’re a business owner. Each year can be different when you work for yourself. Your income can fluctuate and you may have new clients with requests that require additional expenses. The Canada Revenue Agency (CRA) has a thorough list of business expenses you can claim on your taxes. The list includes everything from advertising to fuel costs to business startup investments.

But what about items that might be more unique to your business? Or those little everyday expenses that feel like a business expense but might not be? This is where it helps to talk to a tax professional who can explain all the details. For example, you can deduct rent and property taxes if your workspace is in your home. But you can’t deduct mortgage payments. You can also deduct the cost of certain office expenses like pens, pencils, paper clips, stationary and stamps. But the list of approved office expenses doesn’t include items like calculators, filing cabinets, chairs or desks – these items must be capitalized and amortized.

So let’s say you’ve thoroughly reviewed the CRA’s approved list of operating expenses. How can you reduce the amount you pay in taxes after you’ve claimed the usual line items?

1. Make sure your business makes enough to deduct expenses

The CRA expects your business to have a “reasonable expectation of profit.” That means you can’t go around deducting expenses without your business eventually making some kind of profit. For example, there was a recent judgment against a Quebec lawyer. She took a job with the federal government but kept her private practice on reduced hours. She claimed significant business deductions against her private practice not supported by her earnings. As a result, the   CRA denied her claims.

2. Invest in yourself and your business

“You’re allowed to invest in the business,” McQueen says, “and invest in yourself as part of the business.” That could translate into taking a training course or going to a conference. But keep in mind, you can only claim two conventions per year. According to the CRA, both must “relate to your business or your professional activity.” Each convention must also take place in an area where your organization normally conducts business.

3. Consider incorporating your business

It might make sense to incorporate your business. In that case, you will likely lower your personal tax bill if you pay yourself dividends instead of a salary. But McQueen says if you’re withdrawing the money as salary then you're still paying personal tax rates. Incorporating your business makes sense if you have income that you can leave in the corporation where it will be taxed at a lower rate. This could range from 9 to 15% on the first $500,000 of active business income, based on your province or territory of residence.

Feeling uncertain if this is the right choice for you? It can help to talk to an advisor. An advisor can give you give you a new, objective perspective on your business plans. You can better understand the pros, cons and costs of each possible approach or strategy.

4. Get life and key person insurance

Consider corporate-owned life insurance options, including key person insurance for the business owner or shareholder. Permanent life insurance policies include a cash value feature.  Your cash value includes investments that grow tax-deferred. This means you won’t have to pay tax on investment growth or interest earned until you pull money out. True to its name, when the insured person dies, key person insurance pays a tax-free death benefit to the business as the beneficiary.

The death benefit is the amount of money given to a beneficiary or beneficiaries when an insured person dies. That means at least part of the payment from the policy to the beneficiary is tax-free.  It will not be considered taxable income when the beneficiary files their income tax return.

What’s more, with policies other than key person insurance, you can potentially list your family or loved ones as beneficiaries. This way, they can get some of the death benefit to help cover expenses after you die. For instance, they can use it to pay off outstanding debts, rent, mortgage, tuition, child care and more.

Owning a business is an adventure. You’re building a future for yourself and your loved ones while adding jobs and revenue to the economy. Understanding how to navigate the tax system in the most efficient, least costly way allows you to further both goals.

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