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Tax Savings for the Self Employed Business Owner

Definitions

Arm's Length Employees
An arm's length employee is one who is unrelated to the shareholder or owns no shares.
Sole Proprietor
A self-employed person with no employees other than family members.

In 1998, Canada’s Finance Minister proposed to allow self-employed individuals and unincorporated companies to deduct premium and other considerations paid for health and dental plans from their income. The budget papers indicated that this proposal was intended to provide greater equity between employees whose employers could pay such premiums without a tax cost to the employees, and the self-employed.

Prior to this time, an unincorporated business and self-employed individuals did not have this ability. All health and dental costs were paid in after tax dollars.

To qualify for this deduction you must meet one of the following parameters:

  1. Your net income from businesses in which you are regularly and actively engaged must represent at least 50% of your net income for the year
  2. Your net income from sources other than business does not exceed $10,000

 

Two Type of Plans for the Self-employed

Self-employed without employees

If you are a sole proprietor you are permitted to deduct specific amounts from your income depending on the number of dependents you have.Your deduction limits are as follows:
$1,500 for yourself
$1,500 for your spouse
$1,500 for members of your household who are 18 years of age and older
$750 for other members of your household

Example

An unincorporated business owned by you. You are married with two children, ages 12 and 14. You are permitted to deduct from your business income (your income) up to $4,500 in total. $1,500 for you as proprietor, $1,500 for your spouse, and $750 for each of your children.

Self employed business (or unincorporated business) with arm's length employees

If you have arm's length employees (unrelated to you) on a full time basis your deduction (you and your family members) will be determined based on the coverage you provide to your employees. In other words, the amount that you can deduct must be equivalent to what your arm's length employees receive.

Example

You are the owner of an unincorporated business with two arm's length employees. Under existing legislation, in order for you to be able to deduct some or all of your families medical and dental expenses from your income you must provide your employees with equivalent coverage.

Partnerships

If you are a member of a partnership (for deductibility purposes your spouse could not be considered a partner – rather a dependent) you will claim the deduction personally.

Caution

Although the proposed deduction is straightforward in concept, it may be more difficult to apply the deduction rules in practice. It is imperative you contact an Olympia Trust representative as the self-employed plans can become very confusing and complex. Further analysis of your needs may be necessary.