Tax Tips
Ten Timely Tax
Tips
For
Small Businesses, Publishers, and
Authors
Tax Me! I.m Canadian!
Let me start with a short prayer.
.Lord! So far so good: I have not boasted, used foul
language, made any obscene gestures, nor even had any ill thoughts
about anyone. But the big test is coming, Lord, and I need your
assistance. You see, now I have to get up and go to work..
About a year ago I gave a short talk on "Tax
Strategies for Small Publishers and Authors." There are a few points
from it that I would like to review.
Taxing goes way back.
It is mentioned regularly in the bible. Archaeologists
have found clay tablets with cuneiform inscriptions long before
the use of paper.
Bookkeepers came into being lo these many years
ago..
It was necessary for the
farmer to keep meticulous records of the harvest.
It was imperative to record
exactly how many bushels of "corn," meaning grain, so the tax
collector could take 10% for the Pharaoh-king. If you could not
satisfy the collector, he would estimate your productivity and that
calculation would not be in your favor. In fact, after penalties,
you might have been lucky if they left enough for seeding next
year.s crop.
So now! What has changed?
Here are some things to remember.
The tax department is not there
to help us minimize our taxes. Their purpose is to collect as much
as they can get. People regularly over pay taxes.
Your accountant is an extension
of the tax collector.s office, by law. Accounting firms have
been made liable for anything you do that is not acceptable to the
tax department. That is why you are required to sign a
disclaimer accepting all responsibility and vouchsafing the
accountant.
Tax saving
techniques are not for the timid. There are gray areas that you
must be careful about using.
If you are in litigation
with the department, it's not whether you win or lose that
"counts" it's how much it costs you to play their game. They set
the rules and they have an unlimited number of your tax dollars to
play with against you.
Too much of any good will
cause trouble. If you go from tax pig to tax hog you may get
slaughtered. My accountant uses rules of thumb. If the expense is
too large for the supporting income, there must be a good reason
for it. Of course, sometimes part of the expense can be moved into
another category.
For every loophole in the
law there is a cost.a gotcha. There is no free
lunch.
Any interpretation
of the tax law that looks too good to be true.probably
is.
When in doubt,
deficit it out. However, there may be some gray
areas. There are many
legitimate areas of uncertainty in the tax laws. A good strategy is to act on those areas
in which you have little to lose and a lot more to
gain.
Stand up for principles as
long as it doesn't cost more than you can
stand.
By the way, you can read the entire article on my web
www.lyaltapublishing.com
Look under articles . "Tax Strategies for Small Publishers."
Let.s look at what taxes apply in
Canada.
! Direct
taxes
! Indirect
taxes.consumption taxes.
! Sales taxes such as
PST and GST.
! Commodity taxes on
fuels, tobacco products and alcoholic beverages.
! Excise taxes and
custom taxes. These are selective taxes on goods.
Canadian taxation is unique among industrialized
nations in that two governments, federal and provincial, impose
sales taxes on the same transaction.
Income tax is life's biggest expense, but it is the
least of our tax problems.
Tax evasion is illegal, but tax avoidance is a
duty.
The question then is how do we avoid taxes and avoid
tax trouble at the same time?
What are some of the legitimate deductions that we
should be creating? Most of these are obvious to most of us, but
many people overlook some of them.
-
Costs of books
purchased. Obviously, any book obtained to expand your knowledge
and benefit your business should qualify. Clearly, any book used
purely for your entertainment would be excluded. However, if you
are using it to learn about style and technique, the fact that you
enjoy it should not matter.
# Course fees. (These
fees could be considered a capital cost allowance. Any longterm
benefit or one that is ongoing may be considered a CCR expense.)
# Conventions: two per year. Naturally, these must
be related to your business. If you were a financial planner, a
convention on basket weaving would hardly qualify.
# Legitimate business expenses. .All expenses are
legitimate, right?. Wrong!
Expenditures that are made for the purpose of
generating income are usually acceptable. The acid test is whether
or not there is a Reasonable Expectation Of a
Profit.
# Business related
expenses between start-up and first sale.
When you start a new endeavor there are usually
expenses or start-up costs before you can make an income. If you
write a book, there are many expenses before you can get the book to
market. Some people may overlook some of these costs of doing
business.
# Some expenses can be
claimed even without a receipt. Meal costs, when you are on an
out-of-town trip, may qualify for a full write-off. You can take a
flat amount per day without a
receipt. Nevertheless, keep every receipt you can get. Use this
approach if you cannot get a receipt.
# If there is no description on the receipt, then
itemize it yourself. You may forget that you will forget.
Try explaining it to your accountant or to the
tax department when you
know it is legit, but you can't remember
why.
# Be sure to claim any
business losses on your tax return to reduce future tax
liabilities.
Should you do a return, even if you have only a small
income? Well, do you expect to make a larger income in the future?
If so record your losses now so you can claim them in the good years
to come. This is easy if you have a corporation.
# Consider the use of a
corporation. Why? So you can record your early losses clearly.
There is a lot more to the question of incorporation
than can be considered here.
There are pros and cons, but in my experience the only
downside is the cost of starting and maintaining a corporation. The
benefits can easily outweigh these costs if you plan to make
profits.
# Turn personal loans
into business loans. This is another topic that could be too broad
for this discussion.
If you are incorporated, of course, you can loan the
start-up money to the company, via a shareholder loan. If you are a
sole proprietor you can still consider the expense as a business
loan and charge the interest of a loan to the business. There is
more.
# Deduct health and
dental insurance premiums. Even if you are not incorporated you may
be able to write-off these premiums as an expense.
There are some restrictions. If you earn more than
$10,000 from another source, you may not qualify. You must earn at
least fifty percent of your total income in this business to be
considered your principal business.
# Maximize meal
expenses by keeping track of which meals are fully
deductible.
Meals for yourself and a client are deductible at
fifty percent. Meals for entertainment of your employees may be
fully deductible. For example a year end celebration would
qualify.so long as you don't hold such meetings too
often.
# Keep detailed records
supporting the nature of your business trips.
Business trips are often a mix of business and
pleasure. Be sure to record the amount and kind of business
done.
# Write off obsolete or
damaged goods. Nobody would miss this one, right?
Think again, if you don.t have a system it would be
easy to overlook a few items that can add up.
# Write off bad debts.
Of course! It's another obvious one, if you have a system.
But it can easily be missed if you have several small
accounts receivable spread out over the year. Have you got a
system?
# Maximize your income
in the lower tax levels. It makes sense to take as much income as
possible if you are in the lower income tax brackets.
Defer as much income as possible to future years if
your tax bracket will be lower at that time.
# Legally allocate
income among family members. You can pay members of you family to do
tasks that you would hire someone else to do.
Income splitting with a lower
income spouse. There are many
possibilities to split taxable income with your spouse. If you are
not doing this you should look into it.
# Pay a salary to some
family members. You may be able to pay a salary to your spouse,
children, or parents.
Any such salary must be reasonable in the
circumstances.
# Make a family member
a partner. If you employ family members in your business you may
have to set up payroll deductions.
To avoid this make them partners in the
business.
# Do spousal RRSP contributions for a lower income-earning
spouse.
This is a valuable resource. Feel free to call me for
details.
# Minimize RRSP
contributions in low-income years. Use unused contribution credits
in high earning years.
You may not be able to pay the maximum in low income
years
anyway. Seems logical!
# Home office.
Designate an area of your home to be used solely for business
purposes.
Then you can deduct a reasonable amount for expenses
associated with maintaining a home office. Such as a portion
of:
Rent, utilities,
property taxes, and insurance premiums.
Capital cost
allowance, upkeep, and maintenance.
Cleaning
materials.
The amount of expenses related to these categories
must be proportionate to the space used for your
business .
# Have separate
telephone lines for business purposes.
# Know the differences
between a capital and an expense purchase.
# Deduct the capital
cost allowance on personal assets that are now being used in your
business.
# Lease a business machine for two or three years
and write off all of the cost as an expense.
# Record all business mileage and charge up to 41
cents per kilometer up to five thousand kilometers.
Thereafter, you can pay yourself 35 cents per business
kilometer.
# Schedule client
meetings on the way to and from your office.
Traveling to and from your office is not a
tax-deductible expense unless you make business calls on the
way.
# There are more, but I have selected these main ones. The
title only promised ten.
But I could not leave the others out. The above is an
over simplification because space and time would not permit more.
Anyway, you can get books with details if you want to learn more.
This treatise is meant to stimulate your thinking rather than to
make you an expert. The rest is up to you.
Quiz: (Choose
one.)
(A) An REOP is.
1) A special type of RRSP.
2) Revenue Canada.s litmus test for determining the
status of a business.
3) A special type of Revenue Canada audit used for
small business.
4) A type of government grant for small business
owners.
(B) Revenue Canada.s real name is.
1) The agency that keeps trying to put me in the poor
house.
2) Canada Revenue Agency.
3) Canada Revenue and Customs Agency.
4) Canada Revenue and Tax Gathering Agency.
(C) For tax purposes you must keep your business
records for.
1) Five years.
2) Six years.
3) Seven years.
4) Ten years.
(D) A Scanner for tax purposes would be
considered.
1) A personal asset.
2) An expense of the business.
3) Computer hardware.
4) Camera equipment.
(E) You can deduct the
cost of.
1) Any convention related to your business.
2) Any educational convention.
3) Any convention if you are selling books.
4) Any two business-related conventions.
(f) CCA stands for.
1) Canadian Corporation assets.
2) Corporate Capitalization assets.
3) Capital Cost Allowance.
4) Canadian Copyright Announcement.
(G) You can deduct advertising expenses.
1) If they are for purposes of selling product or
services.
2) If you have to pay all costs.
3) If you advertise only through Canadian media.
4) If you use a major national account.
NB: All of the above information is based on the author's
personal experience, but is should not be considered as professional
advice.
When in doubt consult your accountant or other
professional advisor.
By Lyle Manery CLU; CH.F.C
Chimo Financial Service Inc.
or
Lyalta Publishing
Website www.chimofinancial.com
And
www.lyaltapublishing.com
Telephone: 1 403 233-2550 or 1 519 32-1548
Fax: 1 519 3264194
Answers to the
Quiz.
a) (2) REOP
means reasonable expectation of profit.
b) (2)
c) (2)
d) (3) A
scanner and a computer are in the same
classification.
e) (4)
f) (3)
g) (3) If
the advertising medium used is owned in part or wholly by any
foreign agency your advertising expenses may not qualify.
Lyle Manery
Authors Note:
You may copy this article in whole or in part, and/or
distribute it freely providing you retain this notice and the
credits below:
Chimo Financial Servives Inc.
375 County Rd 37
N8H 3V6 | 
