Are you thinking of starting a home-based business? Here are some planning tips, tax rules and advice.
TIPS FOR A SUCCESSFUL HOME-BASED BUSINESS START-UP
1. What’s the difference between a company and a corporation?
Many people are confused about the difference between a company and a corporation. This is a very important difference, both for tax and debt purposes.
Incorporation
You can run a business without setting up a company. Even if you can give your company a name, you’re still the one running the business. You are a “sole proprietor”.
If you set up a company, its name will include the words “limitée”, “ltée”, “corporation”, “compagnie” or “inc. The company is legally separate from you, and it’s the company, not you, that runs the business. Even if you control the company, the business is not legally “your” business, which means you are not liable for the company’s debts. (However, if the company needs to borrow money from a bank, the bank will insist on a personal guarantee from you, so you’ll be liable if the company can’t repay the bank loan. In addition, as a director, you are responsible for certain obligations of the company, such as remitting GST/HST or payroll deductions that the company may have failed to remit).
If you set up a corporation, it will have to file annual T2 tax returns and pay tax on its profits. Once the tax has been paid, you don’t have to simply take money out of the company for yourself. When you want to extract profits from the company, you must arrange for the company to pay you a salary or bonus (which the company can deduct and which is taxable to you as employment income), or to pay you dividends (which are not deductible to the company, but are taxed in your hands at a lower rate, due to the dividend tax credit). These measures involve a certain amount of paperwork, and it’s important that you keep a proper record of what you’re doing, otherwise the tax consequences can be serious if you or the company are audited. The company can also reimburse you for the money you loaned it, without any tax consequences.
Sole proprietorship
Most home-based businesses are simply sole proprietorships. There’s no legal requirement to do so; you don’t have to have a separate name if you have a sole proprietorship, although it’s sometimes advisable to create one to give your customers an impression of professionalism. (If your business is visible, for example, because your customers will be visiting you regularly, you should check that you’re not violating local zoning regulations, or those of your condominium or apartment if you live in a building).
If, when you set up your business, you choose a company name that is not simply your own name, or perhaps your name with an added element, such as “Consulting Services”, you will need a company account in which to deposit your customers’ cheques. To this end, your bank will require that your company be registered with the provincial business registry. This is generally a formality that requires payment of a small fee. Registering a business does not give you any special rights with respect to the chosen business name if it infringes on any trademark; it simply allows you to carry on business, sue and open a bank account in that name.
2. GST/HST
If your total sales exceed $30,000 per year (including the sales of any company you control), you must register for and collect GST and HST. As long as your sales don’t exceed the $30,000 threshold for four consecutive quarters, you don’t have to register for or collect GST/HST.
Even if your sales are under $30,000, if you sell to businesses rather than individuals, you may want to register. You’ll have to collect GST/HST from your customers, but they generally won’t mind, since most companies recover all the GST or HST they pay. You’ll be able to recover all the GST/HST you pay on your business expenses. (You may be able to take advantage of the quick calculation method, which allows you to make a little money on the GST if your taxable expenses are relatively small).
You may also be required to register for and collect provincial sales tax, depending on the nature of the goods and services you provide.
Please note, however, that the same rules apply to any company you own: that company may have to register for and collect GST/HST.
3. Declaring your income
When you operate a sole proprietorship, any income earned by the business is reported on your return under “Business income” (or Professional income, Farming income or Fishing income if you carry on one of these activities).
On your tax return, you must indicate both your gross income (total) and your business income (net of expenses). You’ll also need to produce an income statement showing details of your revenues and expenses (broken down by category, e.g. advertising, supplies, meals and entertainment, telephone, etc.) This breakdown is usually presented on the T2125 form, but is not mandatory.
Your net business income is combined with income from other sources on your return, such as employment income and investment income, which together make up “total income”.
4. Deduction of business expenses
When calculating your net business income, you can deduct expenses related to running a business. Make sure you don’t forget the following expenses:
- Supplies: these include paper, ink cartridges, USB sticks, pencils and similar items you use for work. They may also include publications such as specialized magazines and newspapers. Keep your receipts.
- Telephone: if you have a separate line for your company, the cost is fully deductible. If you use a personal line partly for work purposes, the corresponding expenses are probably included in the “Office expenses” category under the following heading. And don’t forget to deduct your monthly Internet service, and the costs associated with your cell phone if you use it for work.
- Equipment: Expenses relating to expensive “fixed assets” with a long lifespan, such as computers and furniture, cannot be deducted directly. Instead, you must deduct what is known as “capital cost allowance” (CCA), applied to a declining balance over a number of years. The CCA rate depends on the equipment concerned; for example, it is 55% for computers and 20% for furniture.
- Automobile expenses: you’ll need to note the use you make of your automobile for business purposes, as opposed to personal use. We advise you to keep a daily diary in which you record the use you make of your car for business purposes, and the odometer reading at the beginning and end of the year. You can then determine how much you use the car for work, and deduct this percentage from the cost of gas, insurance and your license, as well as car washing, maintenance and repairs. You can also deduct this percentage from CCA (which is 30% per year for an automobile.) However, there is a ceiling on the cost of an automobile that can be used as a basis for CCA deductions. The ceiling is revised every year, but for cars purchased from 2001 to 2018, it remains unchanged at $30,000 (plus sales taxes).
- Meals and entertainment: you can deduct restaurant meals, tickets to sporting events, shows, etc. when the expense is necessary for business (for example, inviting a potential client to a restaurant or field hockey game). However, you can only deduct 50% of the cost as a business expense (long-haul truck drivers can deduct 80% of meal expenses).
5. Office expenses
Home office expenses can be deducted only if they fall into one of two categories:
- Your home is your main place of business, i.e. you don’t have an office elsewhere where you work more often than at your home office. Note that even if a major customer provides you with an office on their premises, it’s still your customer’s premises, and you don’t necessarily lose the right to deduct home office expenses.
or
- Your home office is used exclusively as part of your business, “to meet with customers or patients on a regular, ongoing basis”.
You can only offset your expenses against your business income. Therefore, you cannot use home office expenses to generate a general business loss that can be applied against income from another source.
However, losses disallowed under this rule may be carried forward and used in any subsequent year to reduce income from the same activity (they must be reported on each year’s return in order to carry them forward).
Eligible expenses are based on the fraction of the residence in which you have your home office. When making this calculation, you can exclude common spaces such as hallways and bathrooms from the numerator and denominator. You can choose any reasonable calculation; calculations based on square footage or number of rooms are generally considered reasonable.
Deductible expenses
Expenses you can deduct include :
- rent, if you rent your home for your home-based business;
- interest on a mortgage (but not the principal amount);
- home insurance;
- property taxes;
- utilities: electricity, heating, water, gas;
- telephone, if your personal line is used partly for business;
- maintenance and repairs, as well as supplies (e.g. light bulbs).
You can also deduct CCA (4% of the declining balance of the cost of the building) based on the relevant portion of your residence, but this is often not advisable.
If you’re thinking of starting a home-based business or would like more information, contact one of our experts!
More questions?
How do I incorporate a Canadian corporation?
The Government of Canada provides for the incorporation of a corporation in four steps, and this is done on their online platform.
Step 1: Choose the company name :
The legal name of the company can be either a full name (made up of letters and symbols) or a numerical name.
The full name can be used across Canada when approved by Corporations Canada. To choose this denomination, the person must select the “custom incorporation” option when starting online incorporation.
The numerical name is managed by the government, which assigns the number combination followed by “Canada Inc. Despite this, entrepreneurs can use a trade name for their business operations.
Step 2: Create the articles of incorporation :
Entrepreneurs wishing to incorporate have two options:
– Basic incorporation;
– Customized incorporation.
Basic incorporation is for the person planning to incorporate a small private business. This option is simpler, and includes predetermined articles of incorporation, one or two classes of shares, a maximum of 10 directors and a numerical name.
Customized incorporation is designed to meet the specific needs of the person being incorporated. This option lets you customize the articles of incorporation. The person must indicate the corporate name, the share capital structure and any restrictions on the transfer of shares, the number of directors, any restrictions on the business or commercial activities and any other provisions.
Articles of incorporation may be filed in English, French or both.
Step 3: Choose the initial address for the head office and the first board of directors :
This is the address where the company will receive all documents and keep its books. The person must also mention the full name and address of the persons who will sit on the corporation’s board of directors, in compliance with the requirements. It must also indicate for each director whether he or she is a Canadian resident.
Step 4: Submit and pay fees :
A fee of $200 must be paid when incorporating a corporation via the online platform. There is a quick alternative for an additional $100 to obtain a four-business-hour turnaround time for online incorporation requests.
https://ised-isde.canada.ca/site/corporations-canada/fr/societes-actions/comment-incorporer-entreprise
https://ised-isde.canada.ca/site/corporations-canada/fr/societes-actions/administrateurs-dirigeants#toc-01.01:~:%20d%
How do I incorporate a business in Quebec?
The Registraire des entreprises du Québec offers two online services:
– Produce articles of incorporation with the initial declaration;
– Produce articles of incorporation with notice of registered office address and list of directors.
Produce articles of incorporation with initial declaration:
This service enables anyone to incorporate a Quebec business corporation under the Business Corporations Act. First, the company must produce and transmit its articles of incorporation. Next, it must transmit the company’s initial declaration within 48 hours of transmission of the articles of incorporation.
Produce articles of incorporation with notice of registered office address and list of directors:
This service enables anyone to incorporate a Quebec business corporation under the Business Corporations Act. First, the company must produce and transmit its articles of incorporation. It then has 60 days to transmit the company’s initial declaration.
If you already have a corporation incorporated outside Quebec, you can register it in Quebec using the online service “Filing the declaration of registration of a legal person”.
Choice of name for the corporation :
It is possible to request a numerical designation as the name of a corporation, or to propose a name for the company.
https://www.registreentreprises.gouv.qc.ca/fr/sepf/services_ligne/la-constitution-et-la-continuation/S00435a.aspx
https://www.registreentreprises.gouv.qc.ca/fr/sepf/services_ligne/la-constitution-et-la-continuation/S00435b.aspx
How do I register a business in Quebec?
– A corporation not incorporated in Quebec or continued under a law other than a Quebec law if it has its domicile in Quebec, carries on an activity there, including the operation of a business;
– An individual who operates a sole proprietorship in Quebec, under a name that does not include his or her family name and given name;
– Etc.
Québec business corporations are automatically registered by the Registraire des entreprises du Québec once their articles of incorporation have been filed.
Procedure for registering in Quebec :
Anyone who needs to register can use the online services offered by the Registraire des entreprises du Québec. You must select the type of legal form for which you wish to register, and then follow the on-screen steps on the Registrar’s platform.
https://www.registreentreprises.gouv.qc.ca/fr/demarrer/immatriculer/#:~:%20entreprise%
