I have noticed an increasing trend of people starting home based businesses. I know little to nothing about Nucerity, Mud Bars, Arbonne, ect, but I do know how you can use your home based business to save yourself some money come tax time. Canada Revenue Agency (CRA) allows an individual to deduct from their personal income any interest from a debt or liability that was incurred for the purpose of earning income. All home based businesses are different, but most of them have some form of expense to operate them. There also must be some expectation of revenue or people would not start them in the first place. I am not going to get into CRA’s rules for segmenting cash flow because I have to keep these articles within a certain word count, and it seems like the person who writes the bulletins for CRA must get paid by the word, so I am just going to outline the concept. Let us say for example you have a home based business which sells a certain product; in order to sell this product you must first purchase it (an expense), which you then resell (a revenue). We will also assume that you have a personal mortgage on your home, or a car loan, or basically any personal debt which the interest is non-deductable. What most people will do is they will purchase the product with either available cash or using a credit card, line of credit, ect. If they go with the second option of using debt to purchase the product, then they will most likely use the revenue from the sale of the product to pay down that debt. However there is a much smarter, more efficient way of handling this cash flow. What the person in the above example should do is manage the cash flow in such a manner that allows him or her to convert their personal debt into business debt, which would allow the interest to be tax deductable. You do that by using debt to purchase the products, you then take the revenue from the sale of those products and pay down any personal debt (ie mortgage, car loan). Your personal balance sheet has not changed, the amount of debt you are caring has remained same. However, as far as CRA is concerned, that debt is no longer ‘personal’ it is ‘business’ therefore you are able to deduct the interest from your personal income. This practice can be employed until all of your personal debt is converted which would then allow you to deduct all the interest you pay from your taxable income. If you have a $250,000 mortgage at 4% that’s $10,000 worth of interest that can be deducted from your income (at a 40% marginal tax rate that is a $4000 tax refund), and that’s each year, not a onetime deduction. The above strategy works for non-incorporated businesses, but can also work for non-incorporated farms and independent contractors/sole proprietors. It is my opinion that almost everyone is currently paying too much income tax. The strategy most people use is to purchase RRSPs. Now RRSPs have their place within a plan, but they are greatly overused, and their benefits are very short sighted (if you don’t understand what I mean go ask someone who is retired and needs to withdraw $1.50 from their RRSPs every time they want to purchase something worth $1). There are other strategies available, but it is important to consult with a professional advisor before implementing or changing a financial plan.
Posted on: Wed, 09 Oct 2013 16:42:47 +0000
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