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Canada has two tax systems - one for employees, and another one ?for business owners. This is not what the CRA will tell you but the fact remains - employees are very limited in what they can write-off while businesses are entitled to a wide variety of legally deductible business expenses. (Next logical step would be to stop levying taxes on successful entrepreneurs as I cannot think of one government service worth paying for - which could not be better provided by the private sector…but hey, we are not building the moral case against taxation here?
So it might seem pretty simple and straightforward: one should open a small business and join the ranks of 2.6 million Canadian entrepreneurs who enjoy the favorable tax treatment of their income streams. You don’t need to be a big guy - if you operate a legitimate home-based business with the intent to produce a profit, you can qualify for most of the same deductions as an "office-based" business.
Before we show you what your first steps should be after deciding to run a business, we want to issue a little warning: No one should ever start a home-based business for the purpose of getting new tax deductions. It won’t work. Tax deductions are the result of having a home-based business, not the reason for it. The Big Brother (Canada Revenue Agency in this case) is watching you?BR/>
So what is a business? Surprisingly, the Canada Revenue Agency (CRA), the courts and taxpayers have been arguing a lot about what would seem to be a pretty straightforward question. The reason is simple: CRA does not want to allow a taxpayer to deduct losses year after year in a questionable enterprise. The tax department invented a concept of a "reasonable expectation of profit" (REOP). In the past, if the business could not demonstrate that it could become profitable, CRA would deny the losses. As a result of the 2002 Supreme Court of Canada decision, CRA now only considers the REOP concept if there is a personal element (or hobby) with respect to your business. Otherwise CRA will generally no longer question whether or not you actually run a business. If, however, there is a personal or hobby element in your business, then it must be determined if your enterprise is carried on in a sufficiently commercial manner as to indicate that there would be a source of income ?and therefore a business. In this case the CRA would apply the REOP test. Let’s now review the general factors considered by CRA in assessing REOP as outlined in CRA’s Interpretation Bulletin IT504:
¡ñ Business owner’s qualifications to run a successful enterprise
¡ñ Time devoted to the business
¡ñ Time spent in marketing goods and services of the enterprise
¡ñ Distribution activities: presentation of works, products, services to the public
¡ñ Revenues received and growth of revenues taking into account economic conditions, and other market changes
¡ñ Historical records of profits
So it might seem pretty simple and straightforward: one should open a small business and join the ranks of 2.6 million Canadian entrepreneurs who enjoy the favorable tax treatment of their income streams. You don’t need to be a big guy - if you operate a legitimate home-based business with the intent to produce a profit, you can qualify for most of the same deductions as an "office-based" business.
Before we show you what your first steps should be after deciding to run a business, we want to issue a little warning: No one should ever start a home-based business for the purpose of getting new tax deductions. It won’t work. Tax deductions are the result of having a home-based business, not the reason for it. The Big Brother (Canada Revenue Agency in this case) is watching you?BR/>
So what is a business? Surprisingly, the Canada Revenue Agency (CRA), the courts and taxpayers have been arguing a lot about what would seem to be a pretty straightforward question. The reason is simple: CRA does not want to allow a taxpayer to deduct losses year after year in a questionable enterprise. The tax department invented a concept of a "reasonable expectation of profit" (REOP). In the past, if the business could not demonstrate that it could become profitable, CRA would deny the losses. As a result of the 2002 Supreme Court of Canada decision, CRA now only considers the REOP concept if there is a personal element (or hobby) with respect to your business. Otherwise CRA will generally no longer question whether or not you actually run a business. If, however, there is a personal or hobby element in your business, then it must be determined if your enterprise is carried on in a sufficiently commercial manner as to indicate that there would be a source of income ?and therefore a business. In this case the CRA would apply the REOP test. Let’s now review the general factors considered by CRA in assessing REOP as outlined in CRA’s Interpretation Bulletin IT504:
¡ñ Business owner’s qualifications to run a successful enterprise
¡ñ Time devoted to the business
¡ñ Time spent in marketing goods and services of the enterprise
¡ñ Distribution activities: presentation of works, products, services to the public
¡ñ Revenues received and growth of revenues taking into account economic conditions, and other market changes
¡ñ Historical records of profits