A little self-employment can go a long way toward saving a lot of income tax.
The two main strategies are (1) claiming deductions for expenses related to earning self-employment income, and (2) splitting income – that is, shifting income to family members in a lower tax bracket.
Most important, your self-employment endeavour must have that all-important “reasonable expectation of profit.” So a hobby wouldn’t qualify if there was no chance it would ever be profitable. On the other hand, could you turn a hobby into a profitable sideline?
Having a business plan to support the expectation of profitability can go a long way to impress a Canada Revenue Agency official who might ask you to justify the deductions you are claiming. (See cra-arc.gc.ca/selfemployed for more information – especially the “Business expenses” topic.)
(1) Deductions. “You can deduct any reasonable current expense you paid or will have to pay to earn business income,” says the CRA, noting that personal expenses are not deductible.
Your challenge is to find that reasonable justification for linking an expense to your business.
A home office or other use of your home presents a wonderful way to deduct a portion of expenses (like operating, maintenance, insurance, etc.) that you could otherwise not claim. Visit cra-arc.gc.ca and search the term “work space in the home” to see the CRA’s guidelines.
(2) Income-splitting. Pay family members in a lower tax bracket than you to work in your business – jobs you would have done. Pay rate should equal what you would pay an outsider (of comparable age and skills) to do the same work.
The family member (spouse, children, other relative you are supporting) then uses this lower-taxed money to pay for clothes and other expenses that formerly you paid.
Note these two strategies can also relate to investments like revenue property.
And if the self-employment loses money, you should be able to deduct the loss from your other income – provided your business plan shows a reasonable expectation of profit within a reasonable period.
Mike Grenby is a columnist and independent personal financial advisor; he’ll answer questions in this column as space allows but cannot reply personally. [email protected]
