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Structuring a New Business

Expert: Wayne McDougall

Patrick asked:

I already have a job with the Big Three and I have taken another position with a non-profit organization to run their sports facility. This is a salary job. I need to to set up a home office to handle these duties. I already own a computer, printer, cable internet, etc. I also wish to sub-out some of the office duties to my spouse, plus have her do promotions for tournaments, banner advertizing, etc., and pay her a wage for services. If I pay her an hourly or salary wage or commission, do I deduct it from my overall salary or just the salary I receive from the sports job? I do not want my double income to put me in a higher tax bracket. Should I be a sole proprietor or a partnership? I also will be starting a web page for advertizing the sporting events and leagues with businesses paying for web hits on the page. I may have to purchase new equipment to run the office. I live in southern Ontario.

Wayne McDougall answered:

I have addressed the questions that were asked and commented on several issues that were raised.

The first comment is that when you start a business and use certain assets that you currently own personally, then the assets are notionally acquired by the business at their fair market value at the time that the assets are put into use in the business. Fixed assets such as a computer and printer that are expected to last more than a year are capitalized and then depreciated annually for tax purposes based upon government stipulated rates.

The question of how to structure your set up may not be decided upon by yourself as the conditions of your employment that you have with the company will determine the status of your work as either an employee or self employed person. If you are an employee, then your conditions of employment may allow you to hire an assistant and deduct any wages paid to your assistant. These conditions of employment are spelt out in a form that you need to have signed by your employer ( the form is a T2200). This assistant could be your spouse as long as the spouse is qualified and can provide the services (ie. you cannot claim her as an employee and deduct wages paid to her unless there are actual services provided).

If you are not considered to be an employee, then you will operate as either a self employed proprietorship or possibly as a partnership with your spouse. A partnership differs from a proprietorship as it involves a relationship or contract between two or more people whereas a proprietorship is run as one individual. You could also pay your spouse a salary if she is employed by you and performs services if you run the business as a proprietorship.

Profit remaining in a partnership after deducting expenses are allocated to each partner for tax purposes.

Similar to the comment above, new equipment that is purchased will be capitalized (as opposed to deducted 100% in the year of purchase) and depreciated for tax purposes over the life of the asset.

About the author

Wayne McDougall is a chartered accountant with Toronto-based Brudner Herblum & McDougall LLP, a firm that specializes in tax and business advice to small and medium owner managed businesses.

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