“I asked my tax accountant this question and she shrugged and said I could, but I still don’t believe it.”

Get a new accountant, the first thing you learn at university about tax is the way the taxable income and tax payable is derived, it is key to everything! These guys seem like ameteurs.

Goog luck beating your revenue figure for 07!

Let’s see if I can explain this better in layman’s terms. Saying 100% deductible is confusing because you focus on the percentage portion, and your mind makes that the amount of tax you pay since we always talk about our tax bracket in percentage. Entirely deductible might be a better term, and it means you don’t pay taxes on the entire amount of the deduction. So if you have a $10,000 deduction that is entirely deductible, you get to reduce your taxable income by $10,000.

So to answer your question about savings, if you have a $10,000 deduction that does not change your tax bracket, and you are in a 30% bracket; then you would have paid $3,000 in taxes on that amount and that is therefore what is your tax savings. Or to re-express it in percentages, Percentage Deduction x Percentage Tax Bracket = Tax Savings; or in this case 100% deduction x 30% bracket = 30% savings. Therefore, if you are in the 30% tax bracket, you get a 30% savings (not 70%).

I understand it a lot better now though, thanks. Mainly I try to think of:

“You pay tax on your net income/profit (revenue less expenses)….just remember deductions come off your total revenue, not your tax bill which is calculated last after all deductions/write-offs have taken place.”

However, what about this? Let’s assume the tax bracket doesn’t change and it’s at 30%. Could we not assume that anything you buy that is a 100% business expenditure, such as labour, can’t you really just consider that you’re saving 70% whenever you pay for such a thing? Or am I missing something again?

Thanks.

Matjnewton is partially correct. In Canada, for the 2007 tax year, your basic personal amount you can earn before paying federal taxes is $8,929.00. For BC (provincial taxes) for 2007, the basic personal amount you can earn before paying provincial taxes is $9,027.00.

TD1: http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-07e.pdf
TD1BC: http://www.cra-arc.gc.ca/E/pbg/tf/td1bc/td1bc-07e.pdf

To make this way easier, they have figured out the exact percentage average taxes you must pay on the first $37,178 to be 15.5%. See below link:

http://www.cra-arc.gc.ca/tax/individuals/faq/taxrates-e.html

So yes, if you were able to live off of $8,929, you could lower your taxes to zero by spending the money on business expenses that are fully expensed (not items that must be amortized).

“So in your case 85k-35k=50k
Assume a 30% tax rate so 50k x 30% makes your tax 15k”
SO you would need to spend an additional 50,000 – 8,929 = $41,071. So yah, if you wanted to spend an additional $41 grand, you could have paid no taxes.

No one can live off of $8,929 if they are paying a mortgage and living alone. The more realistic thin to do is to pay attention to the tax brackets, and perhaps use this knowledge to not be in the highest tax bracket next year.

But in order to save $15,000 taxes, spending $40,000 might not work the best unless you are heavily investing into your business to expand it further. In the end, the main point is to make plenty of profit… but profit is taxed. If you do make a ton of profit, then it is very wise to incorporate… Not only is the income taxes on Canadian business much lower for the first $350,000, but you can also pay yourself dividends (flat taxed!) and even pay yourself a small amount of money to lower your taxes to the optimal level!

Hope this somewhat helped.