Consider Entrepreneurship

If both spouses are employed or one earns employment income while the other does not work outside the home, consider whether entrepreneurship is a viable option for the family. We are not recommending that one quit their ‘day job’ to start a business, but would it be appropriate to start a business in addition to your current employment situation? Entrepreneurship has many potential advantages, but the disadvantages should not be discounted. Two potential disadvantages of starting a business, while maintaining your current jobs are:

• Potential cash drain if the business is not successful. This risk can be minimized if the selected business does not invest in buildings, significant levels of inventory, or take on excessive levels of debt.
• Assuming the spouses are already busy with careers, family obligations and personal interests, starting a business will result in a major drain on their free time.

Despite these very real disadvantages, a successful business can generate positive cash flow and provide tax deductions that are not available to employees. If a family starts a business from their home, there are a number of possible tax advantages. These include:

Income Splitting – Salaries can be paid to the spouse and children and this provides an excellent income splitting opportunity. If a salary is paid to the former ‘stay at home spouse’, it is a source of earned income that will generate RRSP contribution room. Since CPP contributions are only required on salary, the spouse will receive an increased level of CPP payments at retirement. In the case of an incorporated company, the initial share structure, i.e., which spouse owns the shares, may provide income-splitting opportunities when the business is eventually sold.

Eventual Sale of the Business – If the business is successful, any gain may qualify for two excellent tax incentives:

• Only 50% of any capital gains is included in income
• There is a $500,000 capital gains exception that applies to the shares of small businesses.

Home and Automobile Expenses – In most cases, the family’s current home and car will be sufficient to support the new business venture. If they are used in the business, a portion of these expenses will qualify for a tax deduction.

Entertainment Expenses – Although only 50% of meals and entertainment expenses are deductible for income tax purposes, individuals may be able to align their personal interests with their business and generate a personal or corporate tax deduction.

Travel Expenses – Travel to visit customers, attend seminars and visit potential suppliers is deductible for income tax purposes. Vacations can be added to a business trip resulting in a ‘tax subsidy’ for certain travel.