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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