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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 — as long as your actions are legit and your claim reasonable.
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 — 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 out laughing."
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 — 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 — even if you have to prorate the cost for a personal component — 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 — 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 — 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."
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