Helping clients work from home

The survey also showed that Canadian men — a group that has been most affected by job loss in recent months — are more likely to strike out on their own, making up 65% of self-employed individuals.

A number of factors have coincided to make working from home a rapidly growing trend. There are clients who have taken severance packages or have been laid off from long time jobs who choose this route. There are also a growing number of retirees choosing to work part-time from their homes.

Setting up these new businesses is not just a case of buying a desk and a computer and writing them off as business expenses. There are a number of issues these clients should examine with their advisors to ensure that the client’s new business is running as efficiently and risk-free as possible.

According to Myron Knodel, director of tax estate planning at Investors Group, the first thing clients need to determine is whether they are truly self-employed. The Canadian Revenue Agency (CRA) will treat a completely independent contractor quite differently than somebody who decides to work from home, but essentially works for one employer.

Many self-employment schemes fall somewhere in between.

“If you are given a job, and you do it when and how you want, where the [only time constraint is you may have a deadline] that would be an independent contractor,” Knodel explains. “If you have a relationship where [your client] wants you to be in the office at certain times, requires that you cannot work for anyone else or hire someone else to do the work, that’s more of an employee-employer relationship.

“If there is uncertainty, you can ask for a ruling. The Canadian Revenue Agency will review your situation and determine what the relationship actually is. Keep in mind the onus is on the person who is paying you as to what the relationship is.”

Tax deductions

If CRA determines a client is self-employed, then there are a number of tax advantages clients can enjoy, most notably deductions on almost all their business expenses.

“There is a necessity of keeping good records; you’re eventually going to have to prepare an income statement for tax purposes. Keep in mind that most expenditures will be deductible, but you’re going to have to provide evidence as to what the activities are relating too,” Knodel says. “This is especially important when it comes to the mileage log of your vehicle because you’re going to want deduct most of the operating expenses of that vehicle. Make sure you keep track of where you went if it’s a business trip, and the mileage of that you incurred.”

Knodel says clients are often unaware that they can deduct a portion of the interest they pay on their mortgage if they are working from home.

“Whatever your interest is you can deduct that portion depending on whatever portion of the home you feel is being used for business reasons,” he says. “Generally the [CRA] asks ‘what’s the square footage of the portion of your home you use exclusively for your business operations?’ There could be areas you’re using for storage for that business. You prorate [what you deduct] based on the square footage used over the total square footage of the home.”

If the client’s business earns gross sales in excess of $30,000 a year than they are required to register for GST and charge clients GST on services rendered, assuming the services they provide are subject to the GST.

“If sales are below $30,000 you can register voluntarily and by doing so you will be able to claim GST credits, meaning any GST that you pay to people you buy supplies or services from, you can now claim that back. You will have to charge your customers GST. If you charge them GST you’re not able to claim any input tax credits,” Knodel says.

An advisor can help their client create a rudimentary business plan, which includes keeping track of the taxes they will owe or the deductions they can claim. Certain home businesses will be required to file quarterly tax statements.

“You may be required to make quarterly installments. You will be notified by the Canada Revenue Agency if this is the case. When it comes to our income tax and Canada Pension Plan obligations, you can wait for the CRA to give you those notifications. Make sure that you do make those installments, because if you don’t, interest will be charged on any deficiencies,” Knodel says. “If you take on employees, you need to withhold income tax, Canada Pension Plan and Employment Insurance premiums and remit that on a monthly basis to the CRA”

Legal risks

Clients also need to be made aware that many municipalities have certain bylaws and zoning restrictions around the type of businesses that can be run from a home. It might help to consult a lawyer to ensure the planned business is compliant with these laws.

“On the one end of the spectrum, if all you’re going to need is a desk and a computer, you’re not going to need extra parking for the property because nobody is going to come to the property. There are a lot of areas where that would be permitted within a residential zoning,” says Kathleen Waters, a former real estate lawyer and the CEO of the Lawyers Professional Indemnity Company (LawPRO). “[Many municipalities] allow you to have a home office and you’re allowed to, [for example], do tutoring or music instruction.”

“If the home becomes a place of business with customers and clients, there often are restrictions,” Waters says.

“As soon as you put a sign on the front lawn, or get into something that involves, parking, deliveries, possible signage on the house or anything that involves staff, you can get into much more complicated issues under the bylaw. Depending on the actual bylaw you may not be able to do what you want in a residential zone,” she says.

Condominiums can have even stricter guidelines on space usage, which the directors of the condo corporation are legally obligated to enforce.

“Condo bylaws can be quite restrictive of what you can do in the unit,” she says. “They are enforceable and the directors have a duty to enforce them. If they find out you’re doing something that is not allowed, even if they don’t think you’re really bothering anyone the legislation is pretty clear — they have to act.”

Waters also points out that if a client is buying property with the intent to use the property as a place of business, they should consult a lawyer to ensure any title insurance purchased reflects that.

“The key, if you’re looking to get a property for some sort of home based business, is to make sure you’re really clear with your lawyer as what type of use you want your home insured for,” she says. “You may need an endorsement or amendment to outline you’re using a portion of the property as a business. If it’s a situation where you are just going to move in and its just residential now but you’re going to change it in the future, you get something now that is called a future use endorsement, which outlines all the laws that will permit you to do what you want to do.”

Also, make sure clients revisit their general insurance needs such as their property insurance policy. A new set of liabilities can be created by running a home business, particularly if your client is having customers into the home.

“Your property insurance may be need to be amended,” Knodel says. “You may need to increase your liability insurance, because the risks associated with your business are now risks that are associated with you if you’re carrying on that business.”

(11/10/09)