This is the first year that I have earned anything outside of normal work, that has produced a significant amount of money that I feel like I should/required to claim it on my taxes.
I looked in to filing it myself and resulted in a number that I didn’t like. I would like to get a second opinion. I would also like to fine someone that can help me start saving for the future beyond RRSP and TFS.
I have a few business licences already in my names, I would prefer to ask a expert about what I can and can not claim over internet hearsay.
Disclaimer: I am not a professional. This is not financial advice. I’m happy to share this from my personal experience though…
Sole Proprietorship
The most basic way to have personal small business income is to register as a “Sole Proprietorship” and get a federal Business Number. This allows you to get a business bank account, a municipal business license, and the like. This has modest income tax advantage though, as your net business income will be directly added to your personal taxable income. It does provide you a way to declare business expenses in order to reduce the net business income though, and that can be substantial. It can even include a portion of your housing costs (rent/hydro/phone/internet/etc) if you work from home. A Business Number also allows you to get GST back on all of your purchases (but that requires that you collect GST from all your clients).
Incorporating
The other option is to form a corporation, which is an independent entity from you personally. The corporation is subject to corporate income tax, and can accumulate profits separate from you. As the sole shareholder, you can elect to pay yourself dividends from time to time, which of course will be included in your personal taxable income, although it can be at a lower rate. If your corporation makes wildly different amounts from year to year, this also allows you to buffer that income and pay it out to yourself slowly in the most tax efficient way. Incorporating has some fees and quite a lot of ongoing maintenance paperwork.
Savings
Savings is quite another matter. I use a “lazy portfolio” using asset allocation. I have it spread out over RRSP, TFSA, and unregistered accounts. I own mostly low-MER ETFs. I use Questrade as my brokerage and Tangerine (AKA ING Direct) for cash savings. I spend about an hour per month maintaining this, but lots of people do it once per quarter.
Remember that “financial advisers” are salespeople. If you are not paying them directly for their time, then they are incentivized to direct you towards financial products that include hidden recurring commissions for them and their firm. These fees add up to many tens of thousands of dollars over your lifetime. Pretty much all major banks work this way.
I know there are different types, including those who don’t take commissions. In the US there’s networks specifically for these kinds of financial advisers, which makes finding them easy - but I’m not aware of anything similar in Canada. Does anybody know?
Preet Banerjee is a proponent of this model in Canada (and a pretty sensible commentator overall). Here’s a good overview article by him from when they launched the directory.