How much do you know about financial independence?

I have always thot owning your RE is a good idea and i think thats proven out since rents have gone mach stupid IF you can find a place to rent and IF that place doesnt get sold out from under you, I read about a lot of seniors who are fucked by rising rents and a shortage of places to live

having a mortgage in retirement was OK, in my case it was small and I was just waiting for the inheritance

IMO you don't want the government knowing too much about your business, instead of the nickle n dime approach to payiing income tax I just hit a few button on the wealth simple web site and pay the number

Rent vs. buy is very location dependent. The calculator below is nice if you want to see what that comparison is like in your area. When I hear people talk about the question I don't get the impression they've run the numbers and thought it through comprehensively. That said if you want to own no matter what or you want to rent no matter what there are definitely qualitative differences that can sway the decision even if the end result is not the most optimal financial choice.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

If you buy a house you can pay it off and let that equity sit there or you can keep a mortgage and invest that capital. There is no right or wrong answer for everyone so it'll come down to your particular details which way is best.

I think the time ask that question was so 20 yrs ago

Posted by: syncro

Posted by: niels@nsmb.com

I don't see deducting business expenses (including business-use-of-home expenses) as magically generating additional income or reducing my tax burden. These are real expenses so deducting them is simply part of calculating my net business income. If I didn't deduct those expenses, I'd be overpaying taxes.

No it's not technically magically (your words, not mine) generating income or reducing taxes, but for a home based business you're turning space you're already paying for that isn't providing you with any financial benefits into one that is. So for example if someone has a spare room that sits empty a lot of the time and hardly ever gets used, but using that space for a home based business it now provides with a tax credit against any income you make. Depending on how one's business is set up and run, if those business use of home credits are equivalent to the income the business generates (after costs like equipment purchases, insurance, etc) then there is no tax paid on that income. The result for the sole proprietor is they have generated additional income with no tax burden. Depending on the size of the business use of home expenses this could be a notable amount of income. But even if it's just a small amount, say under $10K, that's an extra $10K of income that's not being added to your overall tax burden. You can consider the same line of thinking with vehicle expenses if your vehicle is also used for business purposes. Whatever percentage of the vehicle use is for business purposed, that percentage of vehicles expenses is a write off. So while it may not be a net plus for things like fuel/oil/repairs, if a vehicle is leased then the business use percentage becomes a tax credit that you would not get if there was no home business. What's better, being able to write of 25% of your vehicle lease or zero?

Having a sole proprietor home based business can be a good way to generate extra income with no additional tax burden for potentially little effort into running the business depending on what it is. For some people it could offer the potential to turn a hobby that makes a little cash on the side into a legitimate business that provides an additional revenue stream. The point of my post is that you can use the tax system to your advantage if you know how. Big business has been doing it for decades, why shouldn't the average person take advantage of the same benefits as well?

I agree that using a space in your home for your business can be a more efficient use of that space. I also agree that turning a hobby into a small business can be a nice option to create an additional income stream in retirement. My point is that the space has a cost and while using it for business you can't use it for anything else. If that "anything else" is letting the space sit empty, that just means you optimized the use of your home, not your tax burden.

Compare it with downsizing to a smaller/cheaper home without that space and renting a separate workspace for your business. It's effectively the same from a financial point of view: you reduce personal living costs, while your business pays for a workspace. In both scenarios, the cost of using the workspace is a real business expense that you should definitely claim as such on your tax return. Semantics, I know, but your explanation reads like home-use-for-business is a trick to pay less taxes, which it is not in my opinion.

It is also worth mentioning that since we are talking about retirement, presumably this business would be part-time so you'd have to pro-rate the deduction. The CRA guidelines are pretty clear about this. For a few hours a week retirement side-hustle, the deduction may end up being pretty insignificant.

Obviously you should try to optimize the deductions that are available to you but as an average person you simply can't take advantage of the same benefits that big corporations have to legally avoid/evade taxes because you lack the scale and the multinational footprint, for example to set up complex structures leveraging differences in tax rules in different jurisdictions etc.

However you can get a slice of the profits made this way by big corps by investing in a low-cost world stock market index ETF! ;-)

Posted by: Vikb

Rent vs. buy is very location dependent. The calculator below is nice if you want to see what that comparison is like in your area. When I hear people talk about the question I don't get the impression they've run the numbers and thought it through comprehensively. That said if you want to own no matter what or you want to rent no matter what there are definitely qualitative differences that can sway the decision even if the end result is not the most optimal financial choice.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

If you buy a house you can pay it off and let that equity sit there or you can keep a mortgage and invest that capital. There is no right or wrong answer for everyone so it'll come down to your particular details which way is best.

This. For some reason many people get really emotional about the rent vs own question but I also have the impression most people don't know how to compare the two properly in a given situation because not all costs of owning are immediately obvious/visible (don't even start about opportunity cost).

Bottom line either scenario can work out fine financially IF in the rent scenario you are disciplined and invest in the stock market. Pick a random multi-decade period and sometimes owning comes out ahead, other times renting does. Owning works out for most people because their mortgage forces them to save and invest (build home equity) whereas renting they wouldn't save.

Knowing that financially either scenario is fine (since I'm disciplined), that makes the decision more of a lifestyle choice. Each scenario has different risks and rewards (financial and non-financial), choose what fits your personality, lifestyle, phase of life, budget, etc.

The Wealthy Renter is a good book that compares owning vs renting without any bias or emotion. It helped me a lot to understand my options. Ben Felix also has some youtube videos explaining how to compare.

Posted by: niels@nsmb.com

It is also worth mentioning that since we are talking about retirement, presumably this business would be part-time so you'd have to pro-rate the deduction. The CRA guidelines are pretty clear about this. For a few hours a week retirement side-hustle, the deduction may end up being pretty insignificant.

However you can get a slice of the profits made this by by big corps by investing in a low-cost world stock market index ETF! ;-)

You don't report hours worked for your side hustle - just income and expenses. I agree though that a small level biz may not justify the tax credits, but as long as one's business shows reasonable income/expenses and is not perennially running a loss then they should be safe from the taxman's scrutiny. As with anything financially related, it's wise to get professional advice if one is unsure of how the rules may apply to their particular situation. Yes a sole proprietorship is not going to enjoy the same tax benefits as a big corp, but why not take advantage of the benefits that do exist if it they work for people. And yes investing into TFSA/RRSP with products like etf's and index funds are a smart move for the average person who wants a financial portfolio that does not require a lot of oversight. On that end I think the route of investing in RRSP's and putting the tax refund into a TFSA is a good move for many people who earn avg/median incomes - best of both worlds. Again tho, YMMV.

Posted by: syncro

You don't report hours worked for your side hustle - just income and expenses. I agree though that a small level biz may not justify the tax credits, but as long as one's business shows reasonable income/expenses and is not perennially running a loss then they should be safe from the taxman's scrutiny.

"If you run the business for only part of the week or year, reduce your claim accordingly."

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/business-use-home-expenses.html

Whether you want to commit tax fraud is up to you. Personally I'm one of those dumbasses who is completely honest on their tax returns.

If someone gives me cash ... huh what cash ?

But if i am cashing a check from someone who sends me a T4 I report that for sure

with the wealth simple I just hit a few buttons and it completely fills out my T1 so I know that CRA knows

probably a good idea to pay it and actualy I don't have any choice cuz they will reassess and I will owe

Posted by: niels@nsmb.com

Posted by: syncro

You don't report hours worked for your side hustle - just income and expenses. I agree though that a small level biz may not justify the tax credits, but as long as one's business shows reasonable income/expenses and is not perennially running a loss then they should be safe from the taxman's scrutiny.

"If you run the business for only part of the week or year, reduce your claim accordingly."

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/business-use-home-expenses.html

Whether you want to commit tax fraud is up to you. Personally I'm one of those dumbasses who is completely honest on their tax returns.

What qualifies as part of the week, 4 days, 3 days or 2? What if you work less days some parts of the year and more days other parts? What if the space is used as storage for your business supplies and/or equipment 24/7? The guidelines are somewhat vague and people need to due their due diligence to make sure they are operating within the guidelines. I think tho that in some situations there is going to be some grey area in calculating the business use of home percentage. YMMV

Posted by: syncro

Posted by: niels@nsmb.com

Posted by: syncro

You don't report hours worked for your side hustle - just income and expenses. I agree though that a small level biz may not justify the tax credits, but as long as one's business shows reasonable income/expenses and is not perennially running a loss then they should be safe from the taxman's scrutiny.

"If you run the business for only part of the week or year, reduce your claim accordingly."

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/business-use-home-expenses.html

Whether you want to commit tax fraud is up to you. Personally I'm one of those dumbasses who is completely honest on their tax returns.

What qualifies as part of the week, 4 days, 3 days or 2? What if you work less days some parts of the year and more days other parts? What if the space is used as storage for your business supplies and/or equipment 24/7? The guidelines are somewhat vague and people need to due their due diligence to make sure they are operating within the guidelines. I think tho that in some situations there is going to be some grey area in calculating the business use of home percentage. YMMV

It's not an exact science. You just need to come up with a method to estimate your percentage that is reasonable.

Posted by: niels@nsmb.com

It's not an exact science. You just need to come up with a method to estimate your percentage that is reasonable.

Yup, which is what I was getting at when I said that the business needs to look legitimate. I think the CRA uses the word reasonable on their website to account for the fact that not every business model looks the same or follows a standard 9-5, M-F type of schedule. So while people can and will do what they want, I'd suggest that if they do run a HBB and take advantage of the tax credits that are available that they don't do it in a manner that shows they may be cheating on their taxes. They also need to keep good records, so in the event the CRA decides to reassess you or do an audit, they are able to justify their expenses and show the business as legitimate. Some businesses make that a lot easier than others.

I think most of us agree tho that whatever one decides to do when it comes to finances and investing, it's important to consider a few different options, weight the pros and cons of each one and seek some professional or trusted advice if one is unsure of the details.

sing it Ed..

https://www.youtube.com/watch?v=dmoDc3RwrMM

Claiming business tax deductions against housing costs for a home business has a lot of wierd implications, syncro is oversimplifying a little unfortunately. Definitely talk to a tax accountant before do that as there are a lot of ways you can fuck yourself.

Just as an example, if you claim business taxes against your house, you lose lose primary residence status on it and will incur capital gains when you go to sell it. That could be a pretty big whoopsie that means you either eat into your lifetime exemption or end up with a tax bill probably bigger than your write-offs were.

I run my own business with enough income that we've definitely looked into it, especially after doing a 300k reno that included my office space, but it is not worth it in my case. There are also weird insurance implications, etc. You can't just make an Etsy store selling walnut shell figurines or some shit and start writing off your mortgage. :)

^^^

No, you do not automatically lose your principle residence status if you're claiming business use of home expenses.

As long as the primary purpose of your home is for living in and not for your business, you should be good. I believe the tax regs state that the business must be an "ancillary" purpose, so if people are claiming more than half of the principle residence for business use then you're liable for capital gains tax. Another rule to avoid capital gains is that you can't make structural changes to your home to accommodate the business - ie putting in an outside entrance just for the business. However, if you do cross one of those two thresholds and lose your principle residence status, you only pay capital gains tax on the part of the home that you use for business, not the entire home. The one thing that for sure is a no no is claiming capital cost allowances on your home, that will result in losing the principle residence status for the home.

Say you're using 30% of the home for a biz AND you make structural changes to accommodate the biz, you would pay capital gains tax only on the portion of the home used for the biz. For example, if your home goes up $200K in value, the 30% of the home that is being used for the biz is subject to capital gains tax - you'd be assessed for $60K. You would then pay capital gains tax (25%) on that $60K, NOT the whole $200K, and would owe $18K. Importantly, don't forget that the capital gains is only paid if/when you sell the home. Consider that $18K of tax in my example; if you amortize that over the length of time you had been in the house, say 10yrs, the yearly cost would be $1800. Depending on your monthly business use of home expenses (30% of mtg interest, hydro/gas, utilities, pptty tax from my example) that $1800 could be much less than your yearly expenses, making the deductions very worth it. So yes, you could have to pay capital gains, but it's only on the portion of the home used for the biz and only if it's meets one of the criteria mentioned before; the biz occupying more than 50% of the floor area of the home or if you make structural changes to accommodate the business - like putting in a separate entrance just for the biz.

I agree I did simplify things somewhat, but in my example I was very clear you don't write off the entire mortgage, only the part you use for the biz. I also stated that the business needs to legitimate and "shows reasonable income/expenses and is not perennially running a loss". Later on in the conversation I also said that "it's wise to get professional advice if one is unsure of how the rules may apply to their particular situation." It's not like I said just open an etsy store and start writing off your mortgage - that's being disingenuous.

It might be worth revisiting things in your situation Kenny just to see of you are leaving any money on the table by not claiming business use of home expenses.

ps - IME insurance implications are related to the percentage of the home used for the business and the nature of the business. Your home insurance may need to be increased to cover any special equipment or inventory you store in the home if you have one policy that covers everything ,or you may want to get a separate policy or rider just for the business. You might also need extra insurance in the form of liability if your business involves personal services such as massage or physio. It all depends on the nature of the biz, how much insurance you need, etc, which is something you can figure our with your insurance broker.