WHY OWN A BUSINESS? (tax comments apply to Canada)

It is a good idea to own your own business, even if it is only very casual and part-time, to take advantage of many perks, benefits, privileges, and most important of all - TAXES! You can even earn some part-time income or dabble in your favorite hobby. Your business does not have to be profitable (or be generating much, if any, revenue) in order for you to enjoy and benefit from tax deductions. If, however, your business evolves and becomes profitable and successful, you can turn it into your main occupation and you could eventually sell it for a tax-free capital gain of up to $500,000!

And it's easy! You don't even have to incorporate to get started. Just keep a separate set of financial "books" (i.e. records) relating to you business. There are many good accounting software packages which will let you do this. My favorite is Quicken. Along similar lines, Quickbooks, My Own Business, Microsoft's Money and Simply Accounting will all do a great job for you. It costs you nothing at all to have a personal, i.e. unincorporated business.

Here's the key point: any business expenses which you incur can be deducted from other income even if you are not making any sales or profits - as long as it is your intent to generate income within the next few years! Even items that you buy for personal use may be deductible (at least in part) as long as you use these items for a business purpose as well. You can also accumulate the businesses losses for several years. Now, if you are a student, such a proposition may be very appealing, especially if you are entrepreneurial. You could start your business on a low-key basis, e.g. doing some contract software development, web site page creation, or prototyping work. All of a sudden, you can start to claim, or at least accumulate, extra personal tax deductions. Neat Eh?

Example: Harry Huckinputch from Surrey is an Engineer. He is working full time for a high tech company. However, he has what he thinks is a great idea for reducing internet gaming latencies. But, he will need to spend a great deal of time, maybe years, to do some development work in his spare time. He will need to spend money on equipment, parts, books, supplies, internet access, computer equipment, etc. and use some space in his apartment in order to do his research. He can deduct these expenses from his other income. Since he is in the upper tax brackets, he stands to get back half of what he has been spending. He may even get some SRED tax credits for his R&D work! Even if he doesn't pull of his project, he should still get the tax break. (SRED = Canada Revenue Agency's (CRA's) Scientific Research and Experimental Development tax credit program).

BENEFITS

• Write off all your business-related expenses (can be applied against other income to reduce taxes)
• Join reduced rate clubs - hotels, discount clubs, etc.
• Buy Wholesale (for your business, hobby, and certain personal items)
• May not have to pay GST or PST for certain items as required in your business
• Travel the world, entertain, etc. at reduced, tax-deductible rates
• Enjoy "red carpet" treatment from suppliers, etc.
• Feel Important (yes, that counts, too!)

HOW TO CLAIM

In order to start enjoying some tax savings right away, you can set yourself up as a "Sole Proprietorship". operating under your own name or some other name you choose (e.g. "Mike's Computer Services") as long as you don't use "Incorporated", "Limited", or "Corporation" (or abbreviations thereof) in the name. Keep a record of all your expenses and any income (if any) and report these on your tax return as a business loss (or as business income if you should be so lucky). This goes right on your personal tax return as a single number entered in the "Income" section of your T1 tax return. You can use the CRA forms to assist you in doing the calculations. (e.g. take a look at T2124 - use for calculating Business Income.)

HOW TO START

It's easy. Just Start. You can evolve, modify, grow, develop your business as you go. There are lots of self-help books available - e.g. at book stores, office supply shops, etc. Go to Canada Revenue Agency (CRA) - pick up various publications on eligible business expenses. You may want to register with the Province for PST purposes and with CRA for GST purposes. (Check Finance Canada's web page for more tax related information at www.fin.gc.ca). Whether you like it or not, you've got the government(s) for a partner and you've got to let them know. Find out about their rules and how they would apply to you - there may be some benefits waiting for you.

THE NEXT STEP

If you are really serious and you want to "go for it", then you should give some further thought to the idea of starting a business. For example, you need to decide if incorporation makes sense for you and how you should structure and organize your business.

QUICK HELP & STARTUP CHECKLIST

Many communities have business centers which help companies get launched. There is also a great amount of information available on the worldwide web for the budding entrepreneur. Take a look at the following sites:

Canada/B.C. Business Service Centre -  includes a great checklist on how to get set up from a legal perspective (licenses, registrations, etc): http://www.smallbusinessbc.ca/ This site also offers many useful "how-to's".

Industry Canada has a very extensive and useful site - includes lots of useful small business and start-up info, including the how-to's of writing a business plan: http://strategis.ic.gc.ca/

Most accounting firms publish helpful booklets on this subject, like KPMG's Dynamic Business Planning. It's a good idea to align yourself with an accounting firm early on.

Mike Volker is the Director of the University/Industry Liaison Office at Simon Fraser University, Past-Chairman of the Vancouver Enterprise Forum, President of WUTIF Capital and a technology entrepreneur. 

Copyright 2006-2007 Michael C. Volker
Email: mike@volker.org - Comments, suggestions and corrections will be appreciated!
Updated: 20070904