Professionals may deduct a reasonable portion of the following home expenses: maintenance cost, electricity, heating, homeowners insurance, land tax, and mortgage interest attributed to the office.
The criteria in order to claim home office expenses depends on whether the professional is incorporated or not.
1) The home office must be the professional’s primary place of business. In other words, he or she must spend more than 50% of their work time there;
2) The professional must meet his or her clients or patients at the home.
The home office must be the professional’s primary place of business. In other words, he or she must spend more than 50% of their work time there, even if the professional meets patients at a clinic or hospital and does not meet them at home.
Incorporation allows you to deduct many expenses as long as they are incurred for earning business income. The following is a list of deductions commonly claimed by medical professionals:
Conference fees, including travel fees;
Entertainment costs : deductible at 50% (meals, business outings);
Furniture for the business;
Home office costs;
Telephone, internet, pager, fax bills;
Subscriptions to professional or academic journals in your field;
Cost of an office computer or laptop.
Incorporation offers several tax benefits when a vehicle is used for personal and professional reasons. Two options are available:
1) The vehicle may be put in the name of the corporation;
2) The vehicle may be in your own name.
PURCHASE OF AUTOMOBILE BY THE CORPORATION
Your corporation will pay for all the fees associated with the vehicle. This includes: leasing fees, purchase cost, maintenance fees, repair costs, vehicle registration and insurance.
You must then calculate the taxable portion of those fees. This is based on the percentage of personal use of the vehicle.
Trips and vacations;
Your normal drive from home to work.
You must add the taxable portion to your income. This portion will be paid by way of a dividend issued by your corporation.
AUTOMOBILE OWNED PERSONALLY
You can claim a portion of your vehicle costs that reflect professional usage on a per kilometer basis. Claims must be made regularly. It is necessary to keep a log book to track professional mileage.
WHICH OPTION TO CHOOSE?
1. If your vehicle is worth less than $55,000 (before tax), it is more advantageous to own it personally;
2. If your car is worth more than $55,000 (before tax):
a) It is more advantageous to own it personally if it is used more than 50% for personal reasons;
b) It is more advantageous to own it through your corporation if you use it for professional reasons more than 50% of the time.
3. If you do more than 20,004 km per year for professional reasons, it is more advantageous to own the vehicle through a corporation regardless of the cost of the vehicle.
An analysis of your personal situation will be required to determine which option is best for you.
PAYMENT OF LIFE INSURANCE PREMIUMS
Once you incorporate, your corporation may pay your insurance premiums.
This strategy allows you to save money, even if premiums are not deductible in the corporation. Premiums are paid by the corporation with money taxed at 19% as opposed to 49% when paid by an individual. If the corporation is named as beneficiary of your policy, paying the premiums through the corporation will not incur any taxable benefits to you.
At death, money received by the corporation may be paid to the estate of the deceased professional tax free.
The tax to be paid to finance the purchase of the life insurance policy must be considered in order to determine the actual cost of the premium.
SALARY VERSUS DIVIDENDS
Incorporation offers a certain degree of flexibility in choosing your mode of compensation: salary, dividends or a combination of both. These two modes of compensation entail different tax consequences.
Source deductions (QPP, QPIP)
Dues to the Individual Pension Plan (IPP), if applicable.
Contribution to RRSP
Maximum marginal tax rate of 49%
No source deductions;
No dues to the QPP;
No contribution to RRSP;
Maximum marginal tax rate of 36%
Income splitting possible (consult with a tax expert for tax planning strategies)
The main distinction between a salary and a dividend is the withholding of source deductions.
In some cases, compensation by salary is necessary. For example, when:
You have a child soon to be born and you plan on taking parental leave;
You have a live-in caregiver;
You wish to take advantage of deductions offered for research and development.
CONTRIBUTING TO AN RRSP
When issuing a dividend, you renounce the right to contribute to an RRSP. Is this truly a disadvantage?
No. Once incorporated, your retirement strategy simply changes. Rather than contributing to an RRSP, your goal is to invest as much as possible in your holding corporation.
We have observed that few professionals feel the need to contribute to an RRSP once they incorporate their practice.