BUSINESS

Self-employment allows
more income tax planning

BEING IN business for yourself! opens a whole new world
of tax planning — and saving. Even if you have only a
self-employed sideline, you can sull enter this world.

We continue today with our
summertime review of tax tips and
traps, supplied by Elio Luongo,
senior manager with Peat Mar-
wick Thorne, Chartered Accoun-
tants.

Note: These comments are gen-
eral in nature and tax rules change
constantly. Also beware GAAR
(the general anti-avoidance rule).
Always check further how this in-
formation applies to your situa-
tion and possibly seek expert ad-
vice before taking any steps.

Tip: If you can, choose to be
self-employed. You will then have
a chance to do more tax planning
than employees. In some. situa-
tions, certain salespeople can be
considered self-employed.

Trap: There is often a fine line
between being self-employed and
being an employee. Ask Revenue
Canada for its Employers Guide
to Source Deductions and review
the section headed ‘‘Determining
employer-employee _relationship.”’
You could also ask Revenue
Canada for a ruling using form
CPT-2.

If Revenue Canada rules you
are not self-employed, then it
could disallow many of the deduc-
tions you claimed.

Tip: You may choose any fiscal
year-end for your business, it
doesn’t have to be Dec. 31. And
your self-employed income is tax-
ed in the year in which the
business year-end falls.

So if the year-end is Jan. 31,
1992, you won't fave to declare
your self-employed income until
you do your 1992 tax return in the
spring of 1993 — even though you
earned most of the money in
1991.

Trap: With such a_ year-end,
you will also have to wait an extra
year to claim any start-up losses
against your other income. A
business fiscal year that straddles
a calendar year could affect your
ability to contribute to an RRSP,
as contributions now are based on

Michael!

DOLLARS AND SENSE

the previous year’s income.

Deferring tax is great — until
you retire, incorporate or other-
wise have to pay off what you
owe ... and have no funds set
aside to pay the bill. Having this
deferred and often growing tax
‘‘albatross’’ hanging around your
neck can then be stressful.

Tip: If you are self-employed,
you don’t have to pay UIC
premiums. That will save you up
to almost $1,000 a year.

Trap: If you don't pay UIC
premiums, then you can’t claim
UIC benefits when you are out of
work.

Tip: You can claim reasonable
home office expenses if you work
from your home. This enables you
to deduct part of your mortgage
interest or rent, hydro, property
tax and other expenses which
otherwise would not be deducti-
ble.

Trap: There are quite a few
restrictions on claiming home of-
fice expenses. For example, you
cannot create or increase a loss to
be used to reduce other income. If
you claim depreciation, you might
lose part of the principal residence

capital pains exemption,

Tip: Consider incorporating an
active business to take advantage
of the smalf business deduction
(so the company pays only 19 to
23 per cent), small business capital
gains exemption (up to $500,000)
and income-splitting opportunities
through paying dividends to fami-
ly members (up to $23,000 will be
tax-free if they have no other in-
come}.

Trap: You pay additional costs
to incorporate and maintain a
company. Timing is important;
self-employed losses may be
deducted from other income only
if you are unincorporated. You
definitely need expert advice here.

Tip: “Crystallize’’ the benefit
of the small business capital gains
exemption. This means claiming
the exemption now, while it still
exists, and at the same time in-
creasing the value for tax purposes
(the ‘‘adjusted cost base’) of
qualifying small business shares to
reduce the future tax liability.

Trap: Again, you will need ex-
pert advice here to make sure this
process is advantageous in your
case and if so, to carry out the
procedure correctly. You will also
need to consider the alternative
minimum tax (AMT) and any
cumulative net investment loss
(CNIL) implications.

Tip: If you belong to a partner-
ship, draw some money out of
your capital account and = ac-
cumulated earnings to pay down
non-deductible debts like a home
mortgage. The partnership could
then borrow funds to replace the
lost working capital and the inter-
est would become deductible.

Trap: Not ail partners might
have the same needs for cash and
so might not want to load up the
partnership with debt.

Additional planning could solve
this problem.

Mike Grenby is a Vancouver-
based columnist and independent
financial adviser who works with
individuals; he will answer your
questions as space allows in his
column — write to him c/o North
Shore News, 1139 Lonsdale,
North Vancouver, V7M 2H4,

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Wednesday, August 14, 1991 - North Shore News - 44

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