Business: Your Ultimate Tax Shelter
by: J. Stephen Pope
Starting and operating your own home based
business is the ultimate tax shelter.
Although this article has been written from a
Canadian income tax perceptive, the principles
should be practical in other tax jurisdictions.
1. Non-Deductible Personal Living Expenses
All of us have expenses that we incur in everyday
Either you rent an apartment or house or you own
your residence. Utilities, insurance, rent, mortgage
interest, property taxes, and maintenance and
repairs are typical costs of operating your home.
Likely, you have a vehicle which also consumes
large amounts of cash.
Add to this, dining out, entertainment, gifts,
alcoholic beverages, office supplies, telephone and
many other expenditures, and you have a significant
In most cases, as an employee, retired person,
investor, student, or homemaker, few of these
expenses are tax-deductible to you.
This means that you must earn a considerable
income, pay your income taxes first, and then use
what is left to pay all your expenses.
Some employees may be able to write-off some of
their employment related expenses, if such are
required by their contract of employment. However,
even in this situation, the tax deductions are very
2. Your Own Home Based Business Means Tax
Now consider the situation where you decide to
start your own home based business.
Suddenly, many of your everyday expenses are now
being used for business purposes and are now
If you use one quarter of your home exclusively
for business use, you will be able to deduct (or
write-off) one quarter of all related occupancy
costs. These expenses may include maintenance and
repairs (that are not capital in nature), rent,
mortgage interest, house or apartment insurance,
power, heat, water, and property taxes.
As well, your vehicle expenses used for business
purposes are another tax write-off. If you use your
car ninety percent for business purposes, you can
deduct ninety percent of your vehicle insurance, gas
and oil, maintenance and repairs, car washes,
license and registration, auto club, loan interest
(within certain limits), and other costs from your
income. You may also write-off one hundred percent
of your business related parking. Capital Cost
Allownance (C.C.A.) on your vehicle is also allowed
for income tax purposes; depreciation is the
accounting term for this tax deduction.
The Canadian government also allows as a
deduction, fifty percent of your business related
Also tax-deductible are business related
telephone expenses, Internet access, office
supplies, travel, books, memberships, and a host of
3. Income Splitting with Your Home Based Business
If you have a high paying job, you will pay
higher taxes because the rates of tax increase as
your income does.
With your own business, you can pay reasonable
wages to your spouse and children. In this way, you
can legally divert income taxed at your higher rate
to your family members that are in a lower tax
This tax saving technique is called income
splitting. It is another good reason why your own
home based business is the ultimate tax shelter.
4. Even a Part-Time Home Based Business Works
Even if you have a full-time job, running a
part-time business can be advantageous.
Of course, you must actually run a real,
moneymaking business. Any attempts to write
unprofitable hobbies off will ultimately fail with
the taxation authorities.
If you earned eight thousand dollars during the
year from your part-time business and were able to
deduct eight thousand dollars in car expenses, home
office expenses, entertainment costs, office
supplies, and other business related expenditures,
you would have a net business income of nil. You
would pay no tax on this additional income.
Don't miss this important point! Although these
tax deductions are actual, legitimate business
expenses, these are expenditures you would probably
have made anyway, whether you had a business or not.
Thus, by rearranging your affairs to start and
operate a home based business, you have been able to
convert non-deductible personal expenditures into
legally deductible business expenses. You have
successfully sheltered your income from tax and have
split your income with family members in lower tax
Yes, indeed, your home based business has become
your ultimate tax shelter.