Minding the home front at tax time

They say charity begins at home but this time of year it’s wise to rephrase the old saying to read “effective tax planning begins at home.” This is especially true for financial advisors who spend so much time and energy helping clients figure out deductions that they neglect their own opportunities to save on taxes.

With that in mind, this column is devoted to the needs of self-employed advisors, and the types of costs they can deduct while running their businesses. The expenses that can be deducted by financial advisors who are either employees or commissioned employees are generally more restrictive. Self-employed advisors, however, can claim a wider variety of expenses.

And remember, it is not enough to have a basic understanding of the rules. Tax advice should be sought by a specialist when seeking to take advantage of any self-employment related tax deduction.

A word about record keeping

Before outlining the kinds of expenses that qualify for deductions, it`s important to stress that thorough business records are the sine qua non of successful income and expense claims. Complete records are required to support claims, but the exercise pays additional benefits. Your records will remind you of potential expense deductions come tax time, and they will support your claims in the event of a Canada Revenue Agency audit. It`s extremely important, therefore, to take a year-end “inventory” of all relevant and required documentation. This way, advisors will know their affairs are in order, and that they can make the most of available tax-saving opportunities.

Claims that qualify

In general, self-employed individuals like financial advisors can deduct expenses incurred to earn business income, subject to the following conditions:

• the expense must have been incurred by the individual for the purpose of earning self-employed business income;
• the expense is not a capital expenditure (except for amounts expressly allowed such as tax depreciation, called capital cost allowance and interest);
• the expense is not a personal or living expense;
• the expense must be reasonable;
• the expenses are not made for the purpose of earning income not subject to tax; and
• the expense is not specifically denied by a provision in the Income Tax Act.

Provided that claims meet the above criteria, here are the main categories in which they can be made:

Office expenses

Rent paid for property that`s used to earn business income is generally deductible, as are commercial insurance premiums. In the case of a home office, expenses incurred for the use of the space devoted to the business activity are also deductible, provided one of two conditions are met. The first is the home office constitutes the advisor`s principal place of business, the second is the home office space is used exclusively to earn business income and is used on a regular and continuous basis to meet with clients.

In practice, this means that a self-employed advisor can deduct a portion of home maintenance and repair costs, including cleaning materials, home insurance, mortgage interest and property taxes. As well, a portion of utility costs can also be deducted. One thing to be aware of is that deductions for home office expenses cannot exceed self-employment income. However, expenses that cannot be deducted in one year, can be carried forward indefinitely to subsequent years.

It’s useful here to distinguish between current and capital expenses. Rent would be a current expense; a renovation to expand or improve office space would constitute a capital expense. While the amount paid in rent could be deducted in the current year, a major renovation would be deducted over several years using the capital cost allowance. Usually, it is not advisable to claim a capital cost allowance on the portion of a home that is used as a home office since the ability to claim the capital gain exemption for a principal residence on its ultimate sale will be restricted.

Office supplies

Advisors can deduct the cost of various office supplies and services. On a basic level, this includes everything from pens and paper clips to letterhead and postage stamps. Deductible office services encompass cellular phones, long distance services and internet connections. As with major office costs, it`s important to distinguish between current and capital expenses. A package of printer paper counts as a current expense, but the printer itself rates as a capital expense, as does the attached computer, the desk it sits on, and the chair being used by the advisor. The self-employed advisor can claim these capital assets, but again, it’s done using the capital cost allowance.

Salaries and benefits

Advisors can deduct the gross salaries and benefits they pay to employees, including the employer’s portion of Canada Pension Plan contributions and Employment Insurance premiums. Insurance premiums paid for employee benefits such as sickness, accident, disability and income insurance plans are deductible as well.

If an employee is a spouse, common-law partner or child, the salary paid is deductible so long as the advisor is actually paying it, the employee`s work is necessary to the business, and the salary in question is a reasonable amount for the services provided. It should go without saying that the employed relative must actually perform the services. A good rule of thumb is to apply arms length practices when hiring relatives.It should be highlighted that a self-employed advisor who hires a relative is creating a potential income splitting opportunity.

Interest expenses

Interest on money borrowed to run a business is deductible, including interest tied to financing a home office. Advisors can also deduct interest on a loan made against an insurance policy so long as the interest paid has not been added to the adjusted cost base of the insurance policy.

Various fees related to business borrowing may also be deductible over a period of five years, including those levied for loan appraisals, brokerage, processing, and insurance. Other fees, such as standby charges, can generally be deducted in the year that they are incurred. Fees paid to reduce loan interest may also be deductible.

Professional fees

Dues paid for professional designations to maintain an advisor`s job – including CFP, CFA and CA – are generally deductible, as are fees for memberships in business associations. Membership dues for recreational and sporting clubs are not deductible, however.

Meals, entertainment and travel

You can claim a maximum of 50% of the cost of food, beverages and entertainment incurred in the course of doing business. These deductions apply whether the expenses are incurred close to home or while travelling to business events. Similarly, travel expenses related to the business are deductible. This includes the cost of travelling from home to client meetings and back, provided the home office is the base of the business operations.

Stake your claims

This is far from an exhaustive treatment of the deductions available to self-employed financial advisors but advisors should be aware of the possibilities and seek professional help to make the most of these tax saving opportunities. And always remember: keep receipts and records to support claims. And while tax returns are due June 15, the final payment is due April 30. It makes sense to file by this earlier deadline too.