How to Save For Your Future

There was a time when people were able to look to the government for income support in their old age, but that is not likely to be the case for most of us. It is imperative that you provide in advance for the needs of old age. You must also guard against disability or premature death for the protection of your family.

These are all reasons for starting your personal savings plan now. There are many vehicles for saving that have different benefits for people in different circumstances. The key is to set the money aside and to start as soon as possible.

Set aside 10% of your net income for growth investment. This is a matter of self discipline. If you desire financial security, you must start saving today! In order to find that 10% off the top, you may find that you need a budget. Budgeting is a system of prioritizing your expenses. Pretend that the 10% was never there, so you are not tempting to include it for spending now and then. Start early. Saving as early as possible allows you to take advantage of the magic of compounding, so long as you reinvest the income earned on the investments. Check out the example of compounding in the RRSP section of ‘Tax Tips’.

Make your money work for you. Try to find investments that roll the income back into the investment, or where your money manager does that for you. As you near retirement age, it can be important to have the investment in something where it may readily be reclaimed. Home ownership can provide the opportunity for a profitable investment. A principal residence has tax-free status on sale. Property gives you an asset on which you can borrow additional funds, but be careful about risking your home.

Consider how you will increase your ability to earn. Are you an entrepreneur or do you thrive on education and study? Develop the areas that are your strengths with a goal in mind of being able to support the life style you want to lead. Be proud of your skills and of your ethical behaviour in whatever you do.

Home Office Expenses

Home office expenses are deductible provided you meet one of the following conditions:

1. Your home is your principal place of business. That is, you do not have an office elsewhere. If a single major client provides you with office space on his premises, that still constitutes your client's office. You may still be permitted your deduction for a home office.
   
   
2. Your home office is used exclusively for your business, and is used "on a regular and continuous basis for meeting clients, customers or patients".

Deductible expenses include:

• electricity
• heating
• cleaning materials
• property taxes
• home insurance
• rent and maintenance costs
• mortgage interest
• capital cost allowance (but be careful of this one. It can cause problems later when you sell the home)

The basis of calculation must be reasonable, and is generally square footage or the number of rooms.

Losses for income tax cannot be created or increased by claiming home office expenses.

Self-Employed or Employee

Tests to be met:

• complete control as to the use of time and the way in which services are to be performed
• provide your own tools
• opportunity for profit from services
• risk of loss from enterprise

As a self-employed person, you will lose the right to unemployment insurance benefits, and the employer’s contribution to the Canada Pension Plan will no longer be paid for you. You will probably also lose all the other employment related plans such as pensions, drug plans and life insurance. Ensure that the rates you set for your work will compensate you sufficiently to cover these increased costs yourself.

Additional tax deductions available to self-employed persons include:

• Certain Automotive Expenses
• Accounting and Legal Fees
• Advertising and Promotion
• Bad Debts
• Capital Cost Allowance (Depreciation)
• Entertainment of Clients and Meals (limitation 50% of the lower of actual amount paid; or an amount reasonable in the circumstances)
• Lodging and Travel
• Parking
• Supplies
• Business Taxes, Licenses, Dues, Memberships and Subscriptions
• Computers and Other Equipment
• Leases
• Salaries
• Office Rent
• Training Costs
• Freight, Courier
• Insurance
• Interest
• Telephone Utilities

Expenses include Goods and Services tax (GST) paid on these expenses unless you are a registrant for GST.

Salaries Paid to Family Members

If you have a business (incorporated or not) and you pay your children or spouse, these salaries are deductible if the amount is:

• paid by the business
• paid for work done with respect to your business, and
• is at a rate that you would normally pay an unrelated employee for the same work, and in the case of a child, reasonable for the child's age.

Spouse's and children's salaries are generally reported on T4s as they would be for any other employee.

Keep copies of their cancelled cheques. If your children or spouse are paid in cash, have them sign receipts. Keep copies for your records.

Have minor children file income tax returns as soon as they have earned income. They are able to accumulate earned income room for making RRSP contributions in future years.

One does not normally deduct Employment Insurance from close family members – they would not be able to collect EI if you were to fire them. There are certain circumstances where EI should be deducted, so be sure to check with your chartered accountant to find out what your situation is.

Incorporation

There are two main reasons for incorporating a business.

The first is to provide liability protection, either because of the nature of the business or to provide the legal vehicle to separate the assets in this particular business from the rest of your assets.

The other is to take advantage of the income tax treatment of Canadian Controlled Private Corporations. Provided you are able to leave funds in the corporation to reinvest in active business assets, there is a tax advantage to having the corporation. If you draw out all of the funds from the company on an annual basis, income tax integration ensures that the tax advantage of incorporation is not effective.