# Dealing with additional consulting income



## Vej (Aug 26, 2009)

Hi All,

I have a full time salaried job which earns me 100K per annum. I'm about to get some additional recurring income on the side for a little consulting that I will do in the evenings. 

My question is; what's the most tax effective way to deal with this income? The choice that seems obvious to be is to register a business and run the additional income through that?

I currently rent, but I plan to buy a home by end of this year (See: http://www.canadianmoneyforum.com/showthread.php?t=2781) . I hope to claim back income tax on a home office if that is also possible.

All ideas greatly appreciated as always!


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## Potato (Apr 3, 2009)

Even if you rent, you can still claim legitimate costs relating to a home office (e.g., a percent of the rent based on the percent of your livable area devoted to the office space).

I'm not sure the hassle of registering a business will be worth the savings, especially for consulting that's just on the side of a full-time job.

One last thing to check is the GST/HST rules. You'll have a grace period before you have to start remitting GST, but it'll be good to know in advance when you'll have to start that.


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## the-royal-mail (Dec 11, 2009)

I believe you need a GST # if you do more than $30K worth of business in a year. Is that the case?

Be careful with claiming a portion of your home on your taxes as an office. The space needs to be DEDICATED to this.

I agree with potato. I wouldn't bother with all this complication. Simply declare the money as regular income at tax time and that will be that. You will pay tax on the amount of your income that falls into the highest bracket, not ALL of your income.

This will be simplest.


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## Four Pillars (Apr 5, 2009)

Go ahead with the deductions - you don't have register the business in order to claim the deductions.


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## mrcheap (Apr 4, 2009)

roayl-mail: Last time I checked it was $30K over a year, OR $30K in a single quarter when you needed to register.


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## kcowan (Jul 1, 2010)

Four Pillars said:


> Go ahead with the deductions - you don't have register the business in order to claim the deductions.


I agree. You need a business number to bill the HST. But if you are below $30k in the year, it is not required.


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## davext (Apr 11, 2010)

Think twice before starting a corporation if you don't plan on generating a lot of money. The corporate income tax return is expensive and money going into a business is just deferred taxes. You'll be taxed on the revenue from your business and at your personal marginal tax rate if you pay yourself. If you plan on making $100K/year or more for the rest of your life, then it'll be hard to pay yourself without cringing. That being said, a corporation is a good retirement savings vehicle as well. d


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## kcowan (Jul 1, 2010)

There is another issue. Retained earnings in a corporation eventually have to be paid out to someone. It might be great for income splitting but maybe not. The lifetime capital gains exemption gets used up pretty fast for a successful corporation.


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## canadianbanks (Jun 5, 2009)

I would definitely register a corporation and use it for all the income with the exception of your full-time salary.


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## heyjude (May 16, 2009)

Setting up a corporation entails annual tax filings and accounting which costs money. It is only worthwhile if you can save a significant chunk of money in it as retained earnings, paying yourself dividends later, ideally when you are in a lower tax bracket. When I set up my professional corporation approximately a decade ago, I did a breakeven analysis based on the post tax future values. The breakeven point for corporate retained earnings was approximately $60K. For me, it was worth it, especially as business expenses can be expensed, thereby reducing taxable corporate income.


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## Young&Ambitious (Aug 11, 2010)

GST Registration is mandatory if your revenue exceeds $30,000 for the past 4 quarters, it isn't based on a taxation year. Otherwise it is optional. 

Setting it up as a corporation will likely increase your effort/cost but depending on your situation the savings from active business income tax rates, expenses which otherwise may not be expensable, oppertunity for incoming splitting, etc may make it worthwhile. 

I would recommend getting some firm numbers on your revenues/expenses and taking it to an accountant. And deducting this as a business expense of course 

Goodluck


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## GeniusBoy27 (Jun 11, 2010)

I agree with HeyJude on this. It's not worth it, unless you're making a substantial amount of money leading to retained earnings.

Incorporation doesn't make sense unless you make enough earnings, because of the time costs involved, especially accountant fees, but also board meetings, retention of minutes, etc .... Not really worth it unless you're making enough.


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## FrugalTrader (Oct 13, 2008)

There is definitley a PITA factor in running a corp. There's the annual tax returns, submitting T4/T5's, GST, and a provincial annual return. That's in addition to getting separate bank accounts etc.


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## MoneyGal (Apr 24, 2009)

Most of the advantages listed in this thread and associated with incorporation are available with simple business income (i.e., income-splitting, writing off expenses). 

The one strategy that a corporation offers is the capacity to hold income in the corporation at a lower tax rate. However, this advantage is really only of benefit if:

- you have fully exhausted other tax-sheltering opportunities (i.e., RRSP, TFSA)

- you have and anticipate significant yearly earnings which you want to shelter (HeyJude showed a breakeven point of $60,000; typically I would say that $100,000 of excess cash per year is a good starting point for incorporating).


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> Most of the advantages listed in this thread and associated with incorporation are available with simple business income (i.e., income-splitting, writing off expenses).
> 
> The one strategy that a corporation offers is the capacity to hold income in the corporation at a lower tax rate. However, this advantage is really only of benefit if:
> 
> ...


This (and other comments) are great info. I know a number of other bloggers who incorporated, but for the life of me I couldn't figure out what the benefits were.

When I hit $100k of excess cash per year then I'll revisit the issue.


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## MoneyGal (Apr 24, 2009)

People incorporate for liability reasons; this is a non-financial reason to incorporate. However, it does not by any means provide a creditorproof or lawsuit-proof shield. 

And sometimes customers will require a supplier to incorporate ("we only do business with incorporated entities.")


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