So it might seem pretty simple and straightforward: one should open a small business and join the ranks of 2.6 million Canadian entrepreneurs who enjoy the favorable tax treatment of their income streams. You don’t need to be a big guy – if you operate a legitimate home-based business with the intent to https://bishopsworthswimmingclub.co.uk/ produce a profit, you can qualify for most of the same deductions as an “office-based” business.
Before we show you what your first steps should be after deciding to run a business, we want to issue a little warning: No one should ever start a home-based business for the purpose of getting new tax deductions. It won’t work. Tax deductions are the result of having a home-based business, not the reason for it. The Big Brother (Canada Revenue Agency in this case) is watching you…
So what is a business? Surprisingly, the Canada Revenue Agency (CRA), the courts and taxpayers have been arguing a lot about what would seem to be a pretty straightforward question. The reason is simple: CRA does not want to allow a taxpayer to deduct losses year after year in a questionable enterprise. The tax department invented a concept of a “reasonable expectation of profit” (REOP). In the past, if the business could not demonstrate that it could become profitable, CRA would deny the losses. As a result of the 2002 Supreme Court of Canada decision, CRA now only considers the REOP concept if there is a personal element (or hobby) with respect to your business. Otherwise CRA will generally no longer question whether or not you actually run a business. If, however, there is a personal or hobby element in your business, then it must be determined if your enterprise is carried on in a sufficiently commercial manner as to indicate that there would be a source of income – and therefore a business. In this case the CRA would apply the REOP test.
Let’s now review the general factors considered by CRA in assessing REOP as outlined in CRA’s Interpretation Bulletin IT504:
Ï Business owner’s qualifications to run a successful enterprise
Ï Time devoted to the business
Ï Time spent in marketing goods and services of the enterprise
Ï Distribution activities: presentation of works, products, services to the public
Ï Revenues received and growth of revenues taking into account economic conditions, and other market changes
Ï Historical records of profits
Ï Type of expenses claimed and their r