You & Your Business
Income tax is something you won't be able to avoid.
So let's look at the best ways to minimize it and what other
things you can do to protect your future.
Filing Your Tax Return:
The total income tax you pay each year does not depend on your gross income but it is calculated on your taxable income.
If you know good tax reducing strategies you can greatly reduce the amount of tax you’ll pay to the government.
Don’t Engage In Tax Evasion! There are many legitimate business tax deductions you can claim and strategies you can use that you are legally entitled to.
Some individuals are concerned about claiming too much or claiming tax deductions that they’re not entitled to. Don’t worry about that. You can bet your tax department will correct it and let you know. Obviously there would be some additional tax to be paid (which you would have paid anyway if you hadn’t used the deduction) and there will also be a small amount of interest payable as well.
The strategies we’ll teach you here have been used for years by thousands of Canadians who have learned how to reduce their tax payable. Don't live in Canada? No problem, simply check with your local tax expert to determine if you can use these strategies in your Country or jurisdiction.
Let’s discuss your tax bracket first. In Canada we have a graduated tax system. Yes, the more you earn the more the tax man takes, but he only takes a higher percentage from the amount that falls into the higher tax bracket.
I’ll explain this in a different way. For 2005 there are 4 basic Federal tax brackets. The following tax rates are applied to your taxable income AFTER you have taken the deductions you are entitled to.
16% on the first $35,595 of taxable income
22% on the next $35,595 of taxable income
26% on the next $44,549 of taxable income
29% of taxable income over $115,739
The provinces are now charging a tax on income, whereas before they charged a percentage of federal taxes. We’ll use British Columbia’s tax rate, because each province is slightly different. So provincial taxes have to be accounted for as well.
British Columbia 2005 Tax Rates:
6.05% on the first $33,061 of taxable income
9.15% on the next $33,062 of taxable income
13.7% on the next $9,794 of taxable income
14.7% of taxable income over $92,185
So with the combined federal and provincial taxes shown here, we now have what is called the MARGINAL Tax Rate (2006).
So it looks like this. (We’re rounding numbers here for ease of explanation). The percentage of tax you pay on your highest dollar of earned income is:
22% on the first $ 35,595 of taxable income
31% on the next $ 35,595 of taxable income
40% on the next $ 9,794 of taxable income
41% on the next $ 16,268 of taxable income
44% of taxable income over $ 115,739
(These figures are not exact as they are for example only)
We assume, for our example, John earned $50,000 and had no other deductions but his “Basic Personal Amount”.
His taxable income is $50,000 less 8,648 is $41,352.
This is not how taxes are actually calculated, but for
simplicity we show it this way:
22% of the first $35,595 = $ 7,831
31% on the balance of $ 5,757 = $ 1,784
TOTAL TAXES DUE = $ 9,615
You only pay the higher tax rate on that part of your income that falls into the next bracket.
It’s important that you grasp how the progressive tax rates work so you’ll have greater appreciation of the strategies and deductions we’re going to use. You’ll see that the greatest reduction in taxes is in reducing your taxable income, which we’ll do by creating more tax deductions.
Owning a small business is one of the best ways to create more deductions and a lot of times running this business from home can add additional deductions. Someone who is operating a small business sometimes claims many items of personal property, as deductions.
We’ll use an MLM (multi-level marketing business)for our example.
There are many good MLM businesses for you to look at.
John and Susan started their own MLM business. When working their small business, they need to see people to show this opportunity, so a car and travel is necessary.
John uses his car 50% of the time to promote his business. So he makes sure to get receipts for all his auto expenses throughout the year, such as gas, oil, repairs & maintenance, interest on his car loan, depreciation (or lease costs) and he also tracks his business miles thast the car is used for.He can now deduct 50% of all these expenses from his income.
John and Susan are buying their home which has an $180,000 mortgage on it. They converted the lower level of the home (basement), into an office and an area for holding business meetings. Susan insisted that they have a proper size TV and a DVD player so John can watch his training videos and to hold training meetings.
This area takes up about 40% of the home. At year-end, John adds up all his home expenses and includes the interest on his mortgage, property taxes, gas and electricity. So he deducts 40% of all these expenses from his MLM business income. He also takes depreciation on the TV and the DVD Player, as they are used as business equipment.
When John and Susan travel, they take along some business materials to show people and discuss the business opportunity.
In 2005, they traveled to Dallas, Texas, where it just so happens that Susan’s parents live.
While in Dallas, John talked to some people about his business and gave out some business cards. He also collected some business cards to show that he was actually doing business on their trip.
While in Dallas, John went to a business meeting sponsored by the MLM Company he is associated with. He deducted most of their travel expenses, but no hotel costs as they actually stayed with Susan’s parents.
Their deductions came to $5,100 for the trip.
Paying your Family from your new business:
John and Susan’s kids are involved in the business too.
Jordy, their oldest son, does some telemarketing for them, and
little Susan does office cleanup, she also helps to set up the
meeting room when there are meetings and prepares refreshments
and sandwiches for those meetings.
Instead of these kids getting an allowance, they are paid as sub-contractors. John and Susan know the kids can each earn around $8,600 per year and not have to pay any income tax.
Jordy and little Susan need to file an income tax return each year, even though there is no income tax payable.
The reasoning is this.
What they have earned throughout the year qualifies as earned
income and 15% of that qualifies as RRSP contribution room (IRA in the US). This will continue to accumulate to their benefit until they are grown and are earning enough income to be paying
income tax. This deduction will be very valuable to them at
The income John and Susan pay to the kids is a deductible business expense.
John and Susan know they can have a loss in their business and
generally can charge that loss against earned income to reduce their income tax bill.
In Canada, the income tax law says a business must have a
reasonable expectation of profit and of course John and Susan
do expect to make a profit.
If your business is operating under a sole proprietorship or a
partnership, it is subjected to a test of reasonable
expectation of profit (REOP) review.
An REOP review involves examining the various factors of your business to determine if there exists a reasonable expectation of profit, and thus the existence of a business, for income tax purposes.
This is not a complete list, but here are some of the factors that the Canada Customs and Revenue Agency has used to evaluate REOP:
· Profit and Loss experience in past years
· Significance and growth of gross revenues
· Development of the operation to date
· Planned or intended course of action
· Time spent on the activity in question
· Education, background and experience
· Extent of activity in relation to that of businesses of
a comparable size
If your business is determined to have no REOP, it will be
deemed to be not a business for income tax purposes. As such,
any expenses and associated losses of the activity will be
As long as you are actually working your business in a diligent manner and attempting to earn a profit,this should not cause you any concern about having to pay more income tax because of disallowed deductions.
John created, or will create the following deductions by owning
his own business.
Part of the expenses relating to his:
. Car: Gas, Oil and maintenance and Other auto expenses
. Mortgage interest and taxes
. Utilities and telephone
. Vacation expenses
. Credit card fees and interest
. TV ,DVD Player, Cameras
. Magazine subscriptions
. Computer and printer
. Office furniture
. Recreation Vehicle
. Children’s Allowances
Use deductions to reduce your taxable income....
All of these deductions can be used to reduce your taxable
income against other earned income.
But expenses relating to an office in your home cannot create or increase a business loss.
So if you are already in a loss position because of other
deductions you can’t claim your home office expenses (mortgage
interest, taxes, utilities, etc.).
They can, however, be carried forward to future years to be used at that time, applying the same rule as stated above.
Let’s now look at John’s income tax bill before and after using
his deductions created by the business.
Taxable income was $41,352 after his basic deduction.
22% of the first $35,595 = $7,831
31% on the balance of $ 5,757 =$1,784
TOTAL INCOME TAX DUE = $ 9,615
Additional deductions of:
. US trip $5,100
. Auto Expense $3,000
. Kids Allowance $4,800
. home office expenses of $5,720
John’s income will increase by $5,800 for the year so his total
income is now $55,800 but his TAXABLE INCOME now is $28,532
TOTAL INCOME TAX DUE = $ 6,277
AN INCOME TAX SAVING OF $ 3,338
So John’s income increased by $5,800 and he had
income tax savings of $3,338.
Remember,$4,800 paid to the kids stays in the family also.
This is very nice income for a little part-time business.
This example is quite conservative as we are showing John only
working this business on a part-time basis. As you can
see it is very worthwhile to start a business of your own, even
if it is only a part-time business.
My personal experience of claiming a working vacation as part
deduction on my income tax return brings me in mind of when my
wife and I traveled by car through 15 different states for two
and a half months on our quest to enlarge our MLM business and
enjoy a vacation at the same time.
We traveled through Washington, Oregon, California, Nevada, Arizona, New Mexico,Texas, Arkansas, Georgia, Tennessee, South Carolina, Alabama, Mississippi, Florida and Louisiana.
We met some very interesting people, saw a lot of the U.S. that
we probably wouldn’t have otherwise and at the same time,
enlarged our MLM business and made additional income.
As I mentioned earlier, we tracked our mileage, gas, motel
accommodations, meeting rooms we rented, advertising,
restaurant bills, collected names and addresses of people
we had at meetings or shared our business opportunity with.
As a result were able to write off about 60% of our trip
costs. These were legitimate expenses as we were certainly
working our business and having some fun at the same time.
There isn’t a law saying you can’t have fun while working your
There was also a trip to Cancun, Mexico wherein we showed our
business opportunity to people from many locations in the U.S.
Again we documented everything we did and only claimed the legitimate expenses that related to our business.
Yes, there are some perks to being in business for yourself and
by documenting your expenses that are directly related to your
business enterprise you are reducing your taxable income and as
a result will definitely pay less tax to the tax man.
The combined income increase and
income tax savings is $9,138
Join Us Today!
With each issue of our “Building Your Business” Ezine, you'll receive useful, unbiased information and top-quality resources -- no junk and no filler, just quality tips, articles and downloads.
Building Your Business only goes out when I have
something important or useful to share with you.
I won't fill your inbox with worthless emails every day.
To get Your FREE GIFTS for joining us, simply complete this short
form to subscribe to our monthly newsletter.
Enter correct info or I can't send you the download link.
Enough about income tax let's look at
Go Here to our Home Page
Haven't got your free gifts for joining us? If you haven't done so yet.. please sign up for our ezine BUILDING YOUR BUSINESS. There are many locations throughout the site where you can join us.