Are you the owner of a small business that is a sole proprietorship or a partnership and you file your taxes using a T1 Personal Income Tax Return? Here is a list of small business tax strategies that you can apply to your return this year to lower your income tax bill.
- Always collect receipts for business related activities – it’s amazing how quickly those receipts for parking to meet a client, or having coffee or lunch with a client, mailing letters and picking up coffee for the office can add up especially over a year. Make sure you record and keep all business-related receipts. The CRA does not normally accept credit card statements as proof of expenditures– you need to keep your original receipts in case you are audited.
- Manage your RRSP and TFSA contributions – these are both good income tax deductions for small business owners. As the tax savings are based upon your marginal rate tax it is a good idea to carry forward any allowable tax deductions to subsequent years when you are making a higher income. A Tax-Free Savings Account allows you to shelter savings and investment income from taxes. If you are maxed out on your RRSP contributions this is a good choice to put tax free cash or investments.
- Maximize your non-capital losses – When your expenses exceed your income in any year you can use this loss to decrease your income tax bill. Non-capital losses can be used to offset other personal income in any given tax year and can be carried back three years or carried forward for up to seven years. It makes sense to figure out when it will be to your biggest tax savings advantage to use your non-capital loss. It could be to recover back taxes already paid or to offset a future larger tax bill. For more information see: Claiming Expenses on a Business Loss on Canadian Taxes
- Maximize your charitable income tax credits – charitable donations earn you tax credits but those over $200 give you more credit as they are assessed at a higher rate. Before you donate more of your income be aware that non-registered Canadian charities, American charities, and political parties do not count as charitable income tax donations.
- Maximize your Capital Cost Allowance – in Canada small businesses deduct the cost of depreciable property over a period of years. However, some business owners may not be aware of this and that they don’t have to claim in the year that it is purchased. You can actually use it in a future year to offset a large tax bill rather than in a year when you have little taxable income. You should also make sure to buy and sell your assets at the right time. New assets before the end of your fiscal year and sell old assets after the current fiscal year. Lastly be aware of the 50% rule - in the year that you acquire an asset you are only able to claim 50% and sometimes under the “available for use” rule you cannot claim until the second year after you acquired an asset. Two links for further information – Learn about calculating and claiming Capital Cost Allowance and How to Claim CCA on a Vehicle Bought for Business Use.
- Split your income – By transferring some of your higher marginal rate income to a family member with a lower income you can reduce the marginal tax rate on your income. For example, employing your wife or child in your business and paying them $10,000 per year would mean that they pay very little tax and you will decrease your income for tax by $10,000. You do however have to make sure that you keep accurate records for their employment as you would any other employee.
- Take full advantage of all income tax deductions available to home-based businesses– for more information see Business Use of Home Deduction and 6 Home-Based Business Tax Deductions you Don’t Want to Miss.
- Incorporate your business – Incorporating a business has tax advantages such as the Small Business Tax Deduction where the income of Canadian held corporations is taxed at a special reduced rate. However, incorporation is only effective if your business has grown enough to make it worthwhile as you need significant income to offset the costs of incorporation and you need to leave enough of your business earnings in the corporation to benefit from corporate tax deferral. See Should You Incorporate Your Small Business for further information.
Now you can start to think about tax planning and strategies to reduce your tax bill
From an article by Susan Ward