Businesses for Tax purposes

[Tegra_Devil]

Ive heard of many people starting "empty" business for tax purposes (house, vehicle, or equipment write offs), such as Blogs, photography companies, or handyman companies which only make like 100-200$ a year just for the tax write offs they can get from said company.


Is anyone familiar with this or something similar?

[Hehe]

I will share one that's used by someone I know. He's based in US, so, this is according to US tax code.

He's a car enthusiast and once he was rich enough to start buying exotics, his accountant worked a scheme that he'd create a business of renting exotics, and charged a tad over the going rate of exotic rentals in the area he's in.

He gets to write off pretty much anything car-related.

[Tegra_Devil]

lol! lucky bastard!

[noclue]

If you are only making a tiny sum but deducting more in expenses thus constantly losing money you will get audited. I forgot CRA's criteria but they can just find your expenses invalid and slap you with fines. Worst case scenario is tax fraud lol
Home-based businesses are a big flag.

[Hehe]

Originally Posted by noclue

If you are only making a tiny sum but deducting more in expenses thus constantly losing money you will get audited. I forgot CRA's criteria but they can just find your expenses invalid and slap you with fines. Worst case scenario is tax fraud lol
Home-based businesses are a big flag.

Home-based business would be hard to argue. But in the case I shared, the "rental company" is part of many of his ventures, so IRS has never audited him even it doesn't earn money. Many businesses, especially large corporations use similar strategies all the time to limit their liability on assets/investments all the time. If you are doing it right, it shouldn't raise any flag.

[Autorice]

if you declare substantial losses then CRA will begin to think something is fishy. If you record $5000 losses for more than 2+ years then they're going to wonder why you're in business. If you give them a reason to audit you then they will.

[fsy82]

Are you talking about an actual corporation or a sole properitorship being written off in your personal tax return?

For corporation there is no benefit to you personally to write off any of that stuff. You need to have over $30,000 in sales before you can even register for a GST number. Also in the T2 you are required to mention the kind of business you are doing as well. At the end of the day if you do get audited (which is happening more and more to small businesses) they will require documentation/receipts of the expenses. If those cannot be provided it will be simply denied.

[fsy82]

Originally Posted by Autorice

if you declare substantial losses then CRA will begin to think something is fishy. If you record $5000 losses for more than 2+ years then they're going to wonder why you're in business. If you give them a reason to audit you then they will.

Define substantial loss? I have a client who showed consistent profits for 7 years and than showed a huge loss last year. We were able to use the loss against his previous year earnings and get a refund cheque of over $20,000 from his RC account.

But again the loss has to be justified if you get audited as well. And it was due to leasehold improvements during the year and not being able to concentrate on the day to day activities.

[4444]

you have to have income to have deductions

your deductions have to be related, or incurred in the process of generating said income.

if you're asking this question, you're probably not in the position to write off certain expenses.

[noclue]

Hehe's example is legit because the company is leasing/buying the car, and the owner is "the customer" who pays the company to rent an exotic. Since its a subsidiary of his other companies, he can lose money/write off auto expense as long as the other companies generate profit in the end.

[Autorice]

the red flag show up if it's a brand new business and 2+ years of straight losses. if you've been in business for more than 3 years with profits then it's not as suspicious. if you want to write off an office in your office it is based on sq ft. if you want to write off kms you need to document where you are going and who you are meeting. if you want to deduct meals/travel/lodging again you need documentation. you only need documentation when you get audited.

[fsy82]

Originally Posted by Autorice

the red flag show up if it's a brand new business and 2+ years of straight losses. if you've been in business for more than 3 years with profits then it's not as suspicious. if you want to write off an office in your office it is based on sq ft. if you want to write off kms you need to document where you are going and who you are meeting. if you want to deduct meals/travel/lodging again you need documentation. you only need documentation when you get audited.

Most business in the first 3 years do incur losses. That is not a red flag with CRA. For writing off personal use for business tax return purposes you should also consider pay rent from the business to your personal. You can't or shouldnt just write off expenses and not the rent.

There is a lot of information being said here but I suggest you talk with your accountant. If you do not have one please PM me and I can guide you.

[4444]

Originally Posted by Autorice

if you declare substantial losses then CRA will begin to think something is fishy. If you record $5000 losses for more than 2+ years then they're going to wonder why you're in business. If you give them a reason to audit you then they will.

Why are you talking out of ur arse like this?

It's like ur just making shit up for the sake of hearing urself type.

OP, this is not true. CRA audits for CRA's reasons, not based on some rule like this. Anyway, being audited shouldn't be a concern as you should be able to substantiate all deductions, income and losses regardless

[Autorice]

Originally Posted by 4444

Why are you talking out of ur arse like this?

It's like ur just making shit up for the sake of hearing urself type.

OP, this is not true. CRA audits for CRA's reasons, not based on some rule like this. Anyway, being audited shouldn't be a concern as you should be able to substantiate all deductions, income and losses regardless

my information is from my accountant who i would trust over people like you. you want to start a business and incur losses go right ahead. i try to help the op with info i know and i get these e thugs on here? wtf

[4444]

Originally Posted by Autorice

my information is from my accountant who i would trust over people like you. you want to start a business and incur losses go right ahead. i try to help the op with info i know and i get these e thugs on here? wtf

i'm a CA mate, not an ethug - don't try and be all high and mighty, you're making shit up, or your accountant is feeding you shit and you're eating it, simple as that.

most companies in the start up stage have a period of losses, if the CRA were auditing every company with 3 years of losses or losses of $5K or whatever amount you want to give will end up with the CRA auditing more companies than they would know what to do with.

what designation and experience does your accountant have? i bet a cga who works for some mickey mouse company (or for himself) and is probably an idiot if he's saying stuff like that.

and 'people like me' wtf does that even mean?

[fsy82]

Originally Posted by Autorice

my information is from my accountant who i would trust over people like you. you want to start a business and incur losses go right ahead. i try to help the op with info i know and i get these e thugs on here? wtf

WTF..your accountant isnt doing a very good job of guiding or maybe he is and your not understanding what he has told you. Ive been in the accounting business for 15 years and as 4444 has said CRA can audit for any reason. Hell they might be auditing some other company and come across yours because you wrote a cheque to the audited company.

[highfive]

From what MY accountant is feeding me...CRA also looks into the margins of your business...the industry you're in, you have averages of margins everyone sort of falls to.

If your margins doesn't make sense with the rest of the industry, then you might raise a red flag with CRA.

Also, this is just my opinion, starting a business and running a profit is damn hard. A lot of times, ppl put money in it to start, you rent a place, you hire employees, you pay yourself a salary, and you have other expenses, in the end if you don't do enough business during the year, you might end up coming out with a loss.

[tiger_handheld]

Seriously whats up with all the CRA scam's ideas lately? It was only funny the first time, now it's just stupid..

- I need a rockstar accountant...can I write off my coke?
- I'm a inc'ed professional, can I write off my to/from driving?
- Can I setup a mickey mouse business to write off home office and other shit?


This section used to have some intelligent questions from people who wanted to start up a gig to make an actual living, wtf happened?

OP - at the end of the day, you can start whatever business you like and write off your dog as a security dog and no one would care. Just be able to justify everything during an audit.

Professionally speaking, accountants are paid to outline the risks and the rewards along with a recommendation based on our research/experience/judgement; however the client is ultimately responsible.

[blkgsr]

this may sound like a mickey mouse question but i know others that do it.....so here goes

i'm renting out my house right now, and may very well for a few years to come

what i want to know if it's worth it to set up a company that "manages" and collects the rent while paying the taxes, insurance etc on my behalf....if that makes sense

then i can write off my mortgage and taxes etc accordingly?

please correct me if that is at all wrong...thanks

[Hehe]

Originally Posted by tiger_handheld

Seriously whats up with all the CRA scam's ideas lately? It was only funny the first time, now it's just stupid..

I don't think that using "creative" ways to minimize taxes are scam. It's our responsibility to pay taxes according to the rules. But if one can get around the rules and find a better way to minimize taxes and doesn't do that, the person is essentially paying more taxes than he/she should.

What I do find unfair is that our government has 0 interests in sharing tax optimization with its citizens. Its best interest is for people to pay the most taxes possible rather than what they should actually pay. Hence we as citizens have to resort to accountants for these creative tax-reducing methods (assuming these methods are perfectly set to survive any audit) to actually get as close as possible to our actual tax responsibilities.

[Hehe]

Originally Posted by blkgsr

this may sound like a mickey mouse question but i know others that do it.....so here goes

i'm renting out my house right now, and may very well for a few years to come

what i want to know if it's worth it to set up a company that "manages" and collects the rent while paying the taxes, insurance etc on my behalf....if that makes sense

then i can write off my mortgage and taxes etc accordingly?

please correct me if that is at all wrong...thanks

Management company does nothing to save you taxes. You could write off mortgages (interest) and taxes if your company owns the house and its business is to rent out houses. But then you'd factor in the property transfer tax (assuming the house is currently not under the company's name), capital gain tax (unless it's your primary residence, which it doesn't look like the case) and corporate tax on any earning (before it can be passed to you, which you'd then be taxed again on personal level).

It could make sense if you plan to do it long term with multiple properties. So, any earning would be re-invested rather than given to you as dividend.

[tiger_handheld]

Originally Posted by blkgsr

this may sound like a mickey mouse question but i know others that do it.....so here goes

i'm renting out my house right now, and may very well for a few years to come

what i want to know if it's worth it to set up a company that "manages" and collects the rent while paying the taxes, insurance etc on my behalf....if that makes sense

then i can write off my mortgage and taxes etc accordingly?

please correct me if that is at all wrong...thanks

No. it's not mickey mouse.
Set it up on your personal tax return as a rental schedule. There are many reasons for not setting up a company..for starters..have you looked into setting up a corporation and the fees associated?
If you want more info... I charge.

[tiger_handheld]

Originally Posted by Hehe

I don't think that using "creative" ways to minimize taxes are scam. It's our responsibility to pay taxes according to the rules. But if one can get around the rules and find a better way to minimize taxes and doesn't do that, the person is essentially paying more taxes than he/she should.

What I do find unfair is that our government has 0 interests in sharing tax optimization with its citizens. Its best interest is for people to pay the most taxes possible rather than what they should actually pay. Hence we as citizens have to resort to accountants for these creative tax-reducing methods (assuming these methods are perfectly set to survive any audit) to actually get as close as possible to our actual tax responsibilities.

So you agree with OP's suggestion... I see..ok. To each their own right

You expect the government to tell you how to save on taxes? Really? Thats like some e-com site saying, "oh our regular price is $100 for the item, but WAIT, don't buy today, next Friday we have a 90% off sale, where you can get the same item for $10. "... Really?? ... you probably have an arts background.

[Hehe]

Originally Posted by tiger_handheld

So you agree with OP's suggestion... I see..ok. To each their own right

You expect the government to tell you how to save on taxes? Really? Thats like some e-com site saying, "oh our regular price is $100 for the item, but WAIT, don't buy today, next Friday we have a 90% off sale, where you can get the same item for $10. "... Really?? ... you probably have an arts background.

No, I'm saying that because it doesn't tell everyone how to save, it leaves such opportunity to those fortunate enough to hire dedicated accountant or lawyers to come up with ways to minimize taxes; leaving the tax burden to the rest of the society.

The tax structure is supposedly to be relatively fair so everyone benefit equally from the gov's expenses. And that's why we have tax brackets. In reality though, it's not really the case.

My parents' income are 10x of mine and yet their effective tax rate is much lower. All because they can afford paying some smartass 13k a year to manage their taxes for them. All they do every year is to sign a few papers and voila.

[highfive]

Originally Posted by Hehe

Management company does nothing to save you taxes. You could write off mortgages (interest) and taxes if your company owns the house and its business is to rent out houses. But then you'd factor in the property transfer tax (assuming the house is currently not under the company's name), capital gain tax (unless it's your primary residence, which it doesn't look like the case) and corporate tax on any earning (before it can be passed to you, which you'd then be taxed again on personal level).

It could make sense if you plan to do it long term with multiple properties. So, any earning would be re-invested rather than given to you as dividend.

Feel free to correct me but from my understanding, renting out under a company is not as easy.

1. Depends on how much you earn from the house. If you're renting out for $1500-2000 a month, you annual revenue is what? $24,000? Incorporating it, and paying all the annual report fees, hiring an accountant to do year end and all, it may not be worth it being so little money.

2. If the house is under the company and you're trying to get any sort of mortgage or financing, I believe it'll fall into commercial banking and it'll be a different way of going through the bank. I heard it's a lot tougher.

3. There is a plus with having a company. Corporate tax rate is 13%. But if your rental income is not a whole lot, personal tax rate would still be better.

As for scamming, i don't think it's scamming CRA. It's tax avoision not tax evasion. Perfectly legal and I believe our school system should teach this more honestly.