Do you want to start a business and start a home business? We have assembled an article for you, in which you will read about planning elements, tax rules and, above all, tips for starting a home-based business.

Tips for Starting A Home Business

1. Do you Know the Difference Between a Business, a Corporation and Self-Employment?

When you want to start a business, you can quickly feel overwhelmed by all the information you need to know. As a result, many people don't know exactly what sets a business apart from a corporation. However, it is a very important difference, both for tax and debt purposes.

First of all, you should know that you can create a business and operate it without create a company. On the other hand, even if you can give your business a name, it will always be you who will operate the business. You will be a “sole proprietor.”

Incorporation

If you choose to create a company for your business, its name will include the words “limited”, “ltee”, “corporation”, “company” or” Inc.”. The corporation as such is a person legally distinct from you, and it is the company, not you, who operates the business. Even if you control the company, the business is not legally “your” business, which means you are not responsible for the company's debts. However, keep in mind that if the company has to borrow money from a bank, the bank will insist on obtaining a personal guarantee from you, so you will be held responsible if the company cannot repay the bank loan on time. In addition, as a director, you are still responsible for certain obligations of the corporation, such as the payment of GST and HST or wage deductions that the corporation may have failed to remit.

Moreover, if you incorporate a company, it will have to produce the T2 tax returns annually and pay tax on its profits. Once tax is paid, you should not simply take money out of the company for yourself, as you are not the operator. Instead, when you want to extract profits from the company, you have to arrange for the company to pay you a salary or bonus (which the company can deduct and which is taxable for you as employment income), or that it pays you dividends. These are not deductible for the company, but they are taxed in your hands at a lower rate, due to the dividend tax credit.

These measures involve some administrative formalities, and it is important that you write down everything you do correctly. Otherwise, the tax consequences can be serious if you or the company are audited. You don't want to cheat by mistake. If you have loaned money to the company for one reason or another, they can also repay it to you without tax consequences.

Sole Proprietorship and Self-Employed Person

Home business is most often simply in the form of a sole proprietorship, as it is often just one person, you. When you do a sole proprietorship, there is no legal requirement to do so; you do not have to have a separate name, although it is sometimes advisable to create one to give a professional impression to your customers. If your business is visible, for example, because your customers will visit you regularly, you should check that you are not violating local zoning regulations, or those of your condominium or apartment if you live in a building.
You may decide to choose a business name other than your own name, or you may in fact choose to use your name and add something to it (for example, “So-and-so Consulting Services”). If this is the case, you will need a business account to deposit your customers' checks, as you will not be able to deposit into your own account, which is in your name only. To open a business account, your bank will require, among other things, that your business be registered with the provincial business register. This is generally a formality that requires the payment of a small amount. Registering a business does not give you any specific right to the chosen business name if that name infringes any trademark; it simply allows you to operate, sue, and open a bank account in that name.

2. GST/HST

If your total sales exceed $30,000 per year (this must include the sales of any company you control), you must register for the GST and HST, and therefore collect these taxes at all times if your business is operating in Canada.

If your business is operated in Quebec, you will need to register for QST in addition to GST/HST. As long as your turnover does not exceed the $30,000 threshold for a period of four consecutive quarters, you do not have to register for or collect GST/HST and QST purposes, but you can still register if you want to get ahead, or if you want to look more professional.

Indeed, if your turnover is under $30,000 and you are selling to businesses rather than individuals, you might want to sign up. You will then have to collect GST/HST from your customers, but they will generally not mind since most businesses recover all of the GST or HST they pay. In turn, you will be able to recover all of the GST/HST you pay on your business expenses. However, if your taxable expenses are relatively small, you can take advantage of the quick calculation method, which allows you to make some money with the GST (and the TVQ in Quebec) by declaring a Percentage of taxes charged.

You may also need 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 corporation you own: that corporation may have to register for GST/HST purposes and collect these taxes.

3. Declaring Your Income

When you operate a sole proprietorship, any income earned by the business is reported on your return under “Business Income” (the term will change to Professional Income, Farming Income, or Fishing Income if you engage in any of these activities).
When it's time to file your return, you need to include both your gross (total) income and your business income (net of expenses). You will also need to produce an income statement that will show the details of your income and expenses (broken down by category, for example: advertising, supplies, meals and entertainment expenses, telephone, etc.). This breakdown is generally provided on the T2125 form, but it 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, it is possible to deduct expenses related to operating your business. If you want to be sure you get the deductions, make sure you don't forget the following expenses:

• Supplies: These expenses include paper, ink cartridges, USB sticks, pencils, and similar items that you use for work. They may also include publications such as specialized magazines and newspapers. Keep your receipts.
• Telephone: if you have a line dedicated only to your business, the cost is 100% deductible. If you use your personal line partly for work, the corresponding expenses probably fall under the category “Office expenses” under the following heading. It is important to remember to deduct your monthly Internet service, and the costs associated with your cell phone as long as you use it for work.
• Hardware: Expenses related to expensive “fixed assets” that have a long lifespan, such as computers and furniture, cannot be deducted directly. Instead, you have to deduct what is called “capital cost allowance” (CCA), which is applied to a declining balance over a certain number of years. The DPA rate depends on the hardware concerned: it is 55% for computers, and it is 20% for furniture.
• Automobile expenses : It is important to note the use you make of your car for business, as opposed to your use for personal purposes. Our best advice is to keep a daily journal, in which you record the use you make of your car for your business along with the mileage. Also, write down the odometer number at the beginning and at the end of the year. With all this information, you can then determine the proportion of your use of the car for work. You can then deduct this percentage from the costs of buying gas, insurance and your license, as well as washing, maintaining and repairing the car. You can also deduct this percentage from the CCA (which is 30% per year for a car). However, there is a cap on the cost of a car that can be used as a basis for deducting CCA. The limit is revised every year, but for cars purchased from 2001 to 2018, it remained the same at $30,000 (plus sales taxes).
• Meals and entertainment expenses: You can deduct restaurant meals, tickets to sporting events, shows, etc. when the expense is necessary for business. For example, if you invite a potential customer to a restaurant or to a hockey game, you can deduct this expense. However, keep in mind that you can only deduct 50% of these costs as business expenses (except for long-distance truck drivers, who can deduct 80% of meal expenses).

5. Office Expenses

Home office expenses can be deducted, but only if they fall into either of these two categories:

• Your home is your main place of business. By this we mean that you don't have an office elsewhere, where you work more often than at your home office. However, note that even if an important customer makes an office available to you in their facilities, they are nevertheless your client's facilities, and this situation does not necessarily make you lose the right to a deduction for expenses related to your home office.

Or

• Your home office is used exclusively as part of your business, and is used “to meet customers or patients on a regular and ongoing basis.”

You can only write down your expenses to reduce the income you earn from the business. Therefore, you cannot use home office expenses to produce a general business loss that can be applied to income from another source.

However, losses denied as a result of this rule may be carried forward later and used in any subsequent year to deduct the income generated by the same activity (you will have to present them in each year's return to be reported later).

Eligible home office expenses are based on the portion of the home where you have your home office. When doing this calculation, you can exclude common areas, such as hallways and bathrooms, from the numerator and denominator. You can choose any reasonable calculation; calculations based on square footage, or the number of rooms, are generally calculations that are considered reasonable.

Deductible Expenses

Expenses that you can deduct in your home office expenses include:

• rent, if you rent your home for your home business;
• interest on a mortgage (not the principal amount);
• home insurance;
• property taxes;
• public services: electricity, heating, water, gas;
• the telephone, if part of your personal line is used for business;
• maintenance and repairs, as well as supplies (e.g., lightbulbs)

You can also deduct the CCA (4% of the decreasing balance of the cost of the building) based on the relevant fraction of your residence, but this is often not desirable.

If you are considering starting a home-based business or if you want more information, Contact one of our experts!

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Another version of this text was published on the website of Demers Beaulne. We thought that the topic could be relevant in the context of noa also.