After a few years of working for other people, Julio Ravazzolo, an electrician in Guelph, Ont., started his own business, Juno Electric.
The first thing Ravazzolo did was seek advice from his friend Dennis Weiler, a Chartered Accountant and managing partner at Weiler & Company, an accounting firm in Guelph, Ontario.
Weiler’s first piece of advice: “Go out and buy a new pair of cheap shoes,” he told a rather confused Ravazzolo. “Drop the shoes at a St. Vincent De Paul depot, but take the shoe box home and place it beside your bed,” Weiler told him. “From now on, put every receipt that comes into your hands into that shoe box.”
This simple advice given in the early 1970s has served Weiler and Ravazzolo well and the men remain friends nearly 40 years later. Most tax advice is just common sense, Weiler says. But here are a few tips to help small business owners get started.
Generally, the rule is expenses are tax deductible if they were used to help earn income. That means try and deduct everything you legally can, Weiler says.
For new businesses, Weiler starts by looking at the “tools of the trade,” that an electrician, builder or remodeler might have accumulated before they began their business. Then, he claims the fair market value of those tools as a deduction for income tax purposes. Look at unusual things that you might not have considered before, he suggests. For example, generally deducting home mortgage insurance isn’t allowed in Canada. But if a small business owner uses their home for business purposes, they can claim a portion of the mortgage interest, heat, hydro, property taxes, repairs and maintenance and insurance. That deduction percentage is based on the total square footage used for the home business compared to the total square footage of the house.
The Canadian Income Tax Act states that if you pay your spouse, or teenage child a salary or wage, you are able to deduct this amount if it is a reasonable expense in running a business. Weiler says it’s a great way to take advantage and keep income in the family.
Corporations in Canada can pay mileage to employees. Self-employed sole proprietors are supposed to keep track of the cost of operating their vehicle and then deduct the percentage used for business purpose. If a vehicle cost $10,000 to operate in a year, and it’s only used for business purposes 50 percent of the time, a sole proprietor can only deduct $5,000.
The current general standard is that reasonable meals bought for business purposes are 50 percent tax deductible. Right now there are court cases going through the legal system trying to define what is reasonable, Weiler says, because the Canada Revenue Agency (CRA) has tried to apply a rule that any individual meal that costs more than $100 should not be deductible. To avoid a situation, it is best to avoid trying to expense meals that cost more than $100 a person.
Going to a convention that is directly related to someone’s business is generally allowable, as long as it’s reasonable. So if an electrician wanted to go to a convention related to his field in Las Vegas it would be deductible, but a convention in Vienna, Austria probably would not be, he says. While the CRA allows a business owner to deduct the full airplane ride for a convention, even if personal days are added on, a hotel stay can only be deducted for the days it is actually used for the convention. If a spouse comes along, that spouse’s plane ticket is not deductible, Weiler says.
Canada is offering a federally sponsored tax incentive program, called Scientific Research and Experimental Development (SR&ED) for businesses to develop new skills. Businesses apply for this tax credit for any continuing education training classes or projects. “The government pays for the cost of developing an expertise within a company,” Weiler says. That comes with a hefty cash refund of 35 percent and/or tax credits for expenditures on eligible work.
Many times new business owners wrongfully assume they can write off expenses that are only somewhat related to running a business, Weiler says. “We have to educate them on what types of expenses are generally allowed,” he says. “Things like medical expenses and clothing are usually considered to be personal expenses.”
To keep in good standing with the CRA, Weiler recommends the following advice: “Keep your own books and records, you know the nature of accounting better than anyone else. You’ll save on accounting costs and it’s better than just using the proverbial shoebox.”