Sam lives and breathes fishing. Year after year, he trailers his 30 foot boat behind his Chevy van from his home in Toronto, to North Bay. Sam was already selling his catch to local restaurants, often at a handsome profit, which meant that he was in a tax-deductible business. Sam also wrote to manufacturers of fishing rods, reels, and lures, to see if he could become a distributor, and received several enthusiastic replies, especially from the smaller companies. He bought several samples at wholesale, and began to show them to fellow anglers. He used his boat to house, display, and demonstrate his new line of fishing equipment. Not only has Sam picked up some unexpected income from his venture, but also his expensive hobby has now become a personally and financially rewarding, tax- deductible small business. Look how Sam benefited the first year alone from his small fishing-related business.

The possibilities are endless. Stew combined his interest in flying with another interest, photography, and started a small business he calls “Aerial Shots by Stew.” He printed brochures and business cards, and contacted realtors, the Chamber of Commerce, and the city planning commission about his new venture. He also ran ads in the classified section of the newspaper, offering to give guided air tours for new families moving into the area (for this, he was required to get an additional license). His weekend, part-time business is thriving, and he was able to convert two hobbies into a fun and profitable business. Most of all, he was able to afford his dream of owning his own plane.

There are countless other ways to use recreational assets in a small business and take advantage of the tax deductions and profit potential. Here are a few ideas:

Using your plane for flying lessons.

Sailing lessons on your sailboat.

Chartered fishing trips on your fishing boat.

Water-skiing lessons using your boat and tax deductible skis.

Using your motor home as the principal office for your small business or to display products or services offered.

Using your motor home as a traveling billboard with your ad painted on the side.

Use Third Party Leasing To Make Recreational Assets Deductible.

Third party leasing means offering your boat, motor home, or airplane for rent at fair market rental value, using someone other than yourself as the leasing agent. You may also deduct the business use percentage of the interest you pay on the loans for recreational assets.

When you rent through a third party in the business of leasing, your recreational asset is considered to be used for business purposes. This covers the entire time the asset is available for you, whether or not it is actually used.

If you use the asset for two weeks per year for personal use, and the asset is available for rent for business the balance of the year, you would be granted 50/52 or 96% of the total available tax deductions, including capital cost allowance.

If you are active in the leasing business, and want to offer your products for rent, you can deduct all costs involved, such as approving all leases, formulating a business plan, contracting for maintenance, doing regular inspections, and keeping the business records yourself.

You also would then qualify to take all expense deductions, including capital cost allowance against current income from all sources.

To legitimize your deductions, you can post ads in places like marinas and in the yellow pages.

You should exercise caution before taking for granted that certain payments made by employers to employees are not taxable.

CRA has been fighting a losing battle in the courts over this issue over the past few years, but they don’t always lose.

The Federal Court of Appeal has recently overturned a decision by the trial division of the Federal Court of Appeal and ruled in favour of CRA in the case of The Queen v. William R. Phillips. The Court considered as taxable a $10,000 payment made by Mr. Phillips’ employer as compensation for higher housing costs incurred following relocation. The obvious solution here is to look for a better way of receiving the $10,000. Always remember there is more than one way to skin a cat (Figuratively speaking of course).

For the typical taxpayer, there is a way to get immediate tax relief while funding your RRSP program. Most of us find that each paycheque arrives with some money already deducted for CRA. The amount of this at source deduction is carefully calculated to approximate what your actual tax liability is going to be.

The typical Canadian, when filling out the April tax form, usually finds that a small refund is owing, indicating, in fact, that the government kept just a little too much of your money through its withholding program. If you are contributing to an RRSP program, the chances are that you will find your refund of overpayment is fairly sizable.

The reason for this is that when CRA decides how much to hold back, it does not know in advance the amount you will contribute to a RRSP by February of the following year. The challenge is to calculate an at source deduction rate which considers your future RRSP deduction.

Some people like to get this big refund cheque each year. Do not use the tax department as a method of forced savings. You do not start getting interest on your money until after May 1st of the next year. There are much better ways to invest your hard earned dollars.

Make sure you are having the correct amount deducted from your paycheque, and no more. Often when people are paying into an RRSP, they follow the government guidelines, which means their employer will be deducting too much money from their cheque.

Get CRA to do the work for you. If you are contributing to a prearranged automatic monthly RRSP plan, contact your District Taxation Office and request the form for Income Tax Source Withholding Reductions. Once the tax department has all the information to work with, the government will authorize your employer to reduce your withholding by the correct amount. That means more money in your pocket each week! The amount of extra money depends on your individual tax situation, as well as the RRSP plan that you have chosen.

When you can establish with CRA that you are having more taxes deducted from your pay cheque than is correct, you can instruct your employer to deduct and deposit these funds directly into a RRSP. This is called a “reduced withholding tax.”

By establishing and maximizing a tax free base, you can significantly impact your retirement income. For example, a $20,000 income with a $3,600.00 yearly RRSP contribution would generate about $1,000.00 in reduced taxes. This would generate an immediate tax reduction of about $83.00 per month. Also, the $3,600.00 could have been earning interest right from the beginning of the year. *** This only makes sense if you know how to protect your RRSP from the various tax grabs.

Section 8: (1) b outlines that an employee has the right to use legal expenses as a deduction if the money was spent to collect wages or to qualify for wages.

You are also able to deduct travel, food, and accommodation expenses when you are required to travel away from your normal work area. This would normally be for distances over 40 km from your home or office. Of course, this would only apply if your employer does not reimburse you for these expenses.

Section 8: (3) In order to deduct meals you need to be away from the employer’s municipality for twelve or more hours.

Section 8: (2) b outlines that expenses occurred at your employer’s place of business are not deductible. This implies that deductions away from there are acceptable.

Remember that in many cases a “certificate of employer” is required to qualify for the employment expenses.

It’s important to note that the law is clear in respect to being honest, and that you give the correct data as to the personal information you supply to your employer for income tax deduction purposes. However, I doubt that they would ever check this unless you are caught cheating on your tax return.

The Charity Tax Credit is based on 17% of the first $250 and 29% of the balance up to 20% of net income.

A charitable donation is a tax deduction, which again is different from the above tax credit in that you reduce your income by the amount of the donation up to a maximum of 75% of your net income. This same percentage also applies to Crown and Crown foundations.

It is important to note that you get both your tax deduction and your tax credit. Of course, you would have to have a significant income to justify giving up to 75% of your net income to a charity.

You can get a charitable deduction for your time donated to a registered charity. The way this works is you have to get a receipt for “professional services rendered.” To be sure you get this charitable receipt, demand that you have it before you provide the service. It’s a lot easier to get a receipt before you start, than after the work is performed. You don’t have to be a professional, as long as professionals normally do the service you provided. You can send the charity an invoice and then write it off as a charitable donation. The limit on this is 20% of your income.

The charitable donations tax credit is calculated at the highest marginal tax rate for gifts in excess of $200 as an incentive for larger donations.

Charitable donations which exceed $200 per year are eligible for a special 29% federal tax credit, whereas the first $200 of charitable donations are eligible only for a 17% credit. The maximum you can claim in any one year is 20% of your net income.

To make the most of your charitable donations, consider the following:

1. Lump your charitable donations into one calendar year in order to surpass the $200 threshold.

2. One spouse should claim the other spouse’s charitable donations, if this will allow the claiming spouse to surpass the $200 threshold.

3. If you are below the $200 threshold one year, consider saving your claims until next year, if the combined donations of both years will exceed the $200 threshold.

4. Claim your oldest unclaimed donations first. You do not have to claim the full amount of any year’s donations in that particular year, as any unused donations may be carried forward up to five years.

5. If you live in Canada but work across the border, you may claim donations to American charitable organizations provided they do not exceed 20% of your U.S. income.

6. You may also claim donations other than cash. Refer to these CRA publications for details:

1T-288, Gifts of Tangible Capital Properties to Charity and Others.
1T-297R, Gifts in Kind to Charity and Others.
1T-244R2, Gifts of Life Insurance Policies as Charitable.

Note: For Charitable Donations, official receipts are required for all donations except those shown on your T4 Information slips. Cancelled cheques and photocopies are not acceptable proof of payment (See CRA Interpretation Bulletin IT-110R2, Deductible Gifts and Official Donation Receipts).

50% of capital gains are taxable.

Take advantage of all tax fee earnings. Look to capital gains, or to receive dividends as a method of reducing the amount of taxes you pay. As a corporation, you can claim one quarter of your declared dividends as tax free income. The remaining three quarters are taxed at a lower rate than regular income and can be included in your tax free capital gains.

You can still get the $100,000 tax free capital gains exemption by selling shares in a qualified Canadian small business or qualified farm property. Get the advice of experts if you are considering this.

$500,000.00 of capital gains exemptions are available from the sale of shares in a corporation.

It’s important to note that you should partner your investments (this could be with your wife) so that the capital gains can be split. One partner could invest money cash and the other partner contribute service. This would allow a couple a lifetime gains of $200,000.00 in tax free income.

Capital Gains Exemption

In the 1994, federal budget eliminated the general $100,000 exemption for dispositions after February 22, 1994.

Since 1985, Canadian residents have been able to claim a special deduction to reduce or eliminate tax on up to $100,000 of capital gains. If the gain arose on the sale of shares of an SBC, an additional $400,000 is available.

To qualify for the $500,000 exemption, you must meet the following conditions:

The corporation must be a SBC at the time of the sale. More than 50% of the corporation’s assets must have been used in an active business carried on primarily in Canada throughout the 24 month period immediately prior to the sale.

The shares must not have been owned by anyone other than you or someone related to you during the 24 month period immediately before the sale. The corporation only needs to be an SBC at the time of sale; at least 90% of its assets must be business assets. You may want to consider triggering a disposition of your shares at a time when you are certain that the shares qualify for the capital gains exemption. Transferring your shares to a holding company and electing to realize a gain on the transfer can do this.

The shares taken transferred will establish a fixed cost, thereby reducing any future capital gains when you sell the shares to a third party, or on your death. Look to professional advice in carrying out this exercise. There are pitfalls to be aware of.
In abolishing the “lifetime” capital gains exemption for land, the government elected to have all gains from the date of acquisition of the land to the date of disposition prorated by the number of months. Gains up to March 1992 being tax free, assuming that there is room in the $100,000 ceiling for the seller. All gains for the remainder are taxable under the “normal” capital gains rules under which 50% of the gain becomes taxable at your ordinary marginal rate.

To understand this further, consider an example, of a piece of vacant land purchased in
January 1989 for $50,000 that appreciated in value to $100,000 by December 31, 1992.
The gain appears to be $50,000. If the land was not sold that year, you would assume, that when finally sold, the first $50,000 of the net gain should be tax free under the pre 1992 rules. This is not what happens. If, the land were sold for $125,000 in March
1995, the government would “prorate” the $75,000 gain at $1,000 per month over 75 months. Then they start calculating your allowance at the date of the actual purchase of the property. This means that the government would only be willing to accept a tax free appreciation of only $38,000 instead of the expected $50,000 for the 38 months prior to
February 1992.

This is just an unabashed tax grab that falls under the category of give it to make the population feel good, and take it back, in a way that is less noticeable, harder to understand, and underhanded manner.

Using the government’s actual formula, the non eligible capital gain is considered to be
$37,000 ($75,000 minus $38,000) of which $27,750 is brought into income and $11,100 is payable in taxes.

This is a “double tax.” Not only is the lifetime exemption reduced as to content of land, but also the implementation formula used in this case penalises the taxpayer with an additional tax bill. There is a tax at the time of the sale and the full amount of $11,100 is added to your income. This type of tax distortion will result only when the land appreciated at a faster rate before 1992 than after. You could argue that the land appreciated at a faster rate after 1992. Therefore the opposite conclusion could be reached. I wonder what the government was thinking about when they implemented this policy.

This is just a bold and unexpected step by the government in a series of protracted moves to completely outlaw the $100,000 lifetime gain, one of the only substantial forms of tax relief that Canadians have access to. Too bad we Canadians are so passive about our government activities.