MoneySense Magazine, October 2007
The taxman loves a party
Believe it or not, Ottawa wants you to live it up — just so long as you can find a good business reason for it.
This article was first published in the October 2007 issue of MoneySense.
As a technology consultant
in Montreal, Martin worked most of the summer without a break. When
he felt he needed a holiday, he and his wife flew west in September for
five days in Banff. On their way back, Martin dropped in on a client in
Calgary. The detour probably helped his business; it undoubtedly paid
dividends in other ways: Martin wrote off his airfare, part of the car rental,
and a night’s hotel bill as business expenses.
You, too, may be able to get a nice tax deduction by mixing in a little
work with your pleasure. Canada Revenue Agency says it’s perfectly legal for business owners to do so â€” as
long as your actions are legit and your
Consider that family holiday you’re
planning. Bruce Weismiller, a chartered
accountant with Sadler Weismiller Group
in Surrey, B.C., often suggests to new
clients that their family business hold an
annual general meeting â€” and that it’s
perfectly acceptable for you to hold that
event in Whistler or Vegas. The company
can pick up the expenses for each director,
although writing off gambling costs
would be stretching things too far.
“There’s no reason you can’t hold your
annual meeting in a nice spot,” says
Weismiller. “But it has to be reasonable.
From Vancouver, Las Vegas is just a $200
plane ride. But meeting in Maui is kind
of out.” If in doubt, apply the laugh test,
Weismiller advises. “I tell my clients, you
have to be able to look the [tax] auditor
in the eye, tell your story, and not burst
Evelyn Jacks, the tax expert and author
of Make Sure It’s Deductible, tells the
story of “Jean-Paul,” a divorced electrical contractor whose eight-year-old son lives
in a city four hours away. Jean-Paul visits
his son every weekend, but the commute
is costly. Was there any way, he asked, to
write off at least some of his expenses?
Sentiment couldn’t help him â€” but his
business could. If Jean-Paul started looking
for business in the other city, those
trips could become (at least in part) business
expenses. He could deduct the cost
of visits to meet prospects or negotiate
deals and those deductions could slash
his travel costs.
Business owners should take a tip
from Jean-Paul’s case and examine all of
their annual expenditures to see whether
they can attribute business purposes to
them, says Jacks. “If you can make a business
case for the expenditure â€” even if
you have to prorate the cost for a personal
component â€” the after-tax benefits will
accumulate in double-digit yields.”
You can mix business with pleasure in
other ways, too. Hiring your kids to work
for your business is one time-honored way
of getting money into their hands at a low
tax rate. Even more effective is setting up a family trust, says Gordon Galloway, an
accountant in Toronto. If an operating
company is owned by a family trust, its
profits can be distributed at a low tax rate
to the unitholders â€” which lets you distribute
business income to anyone you like.
Not a business owner? You could be.
Galloway tells of a semi-retired client (let’s
call him Vince) who enjoyed building doll
houses. He donated the results to charities â€”
until Galloway suggested he turn
his hobby into a business. If Vince could
convince the CRA that he was actively
trying to sell his work, he could reduce his
taxable income by deducting his materials,
tools, and household costs related to
his workshop. Since Vince was incurring
the costs anyway, the change created a
multi-thousand-dollar windfall. And Galloway
says that being “in business” actually
reignited Vince’s love of his craft.
Starting your own business has only a
single drawback: the CRA is going to
expect you to make a profit at some point.
But if the CRA ever loses its patience and
decrees that your business isn’t a business,
you can always appeal its ruling. Galloway
says taxpayers can win, if their records
demonstrate good-faith attempts to sell
the product at a reasonable price.
Whenever you mix business with
pleasure, the key is documentation. If
you’re combining a business trip with a
family vacation, take notes of meetings
you attend and the business you conduct.
Keep emails relating to the meetings, and
their results. And be reasonable: your
dinner may be a legitimate business expense,
but your spouse’s probably isn’t.
Weismiller says the CRA likes to see
consistency: spending consistent amounts
on travel or salaries every year is unlikely
to trigger an audit. “Keep it in the zone,” he
advises. Mixing a bit of pleasure with your
legitimate business deductions is allowed,
“as long as you don’t get greedy.”
MoneySense Magazine, October 2007