Tips You Can Do to Save Money on Your Income Tax

Last updated: Feb. 21, 2013 

If you operate a small business, there are a number of things you can do today to make sure you save money on your income tax bill tomorrow. Here are the top 5 tips to get you started.

1. Keep accurate and reliable financial records

One of the best ways to save money on your income tax return is to have accurate and reliable records as the critical building blocks for sound tax planning and for complete and accurate income tax preparation.

• Good records are critical in managing the financial aspects of your business such as: completing applications for grants and rebates, securing loans, and completing GST/HST/PST returns.
• Ultimately, good records are the basis for ensuring you are protected in your dealings with Canada Revenue Agency (CRA) and CRA audit situations.

You can face huge penalties if CRA finds error or omissions in your reported income.

2. Claim all available deductions in your tax preparation

How would you know what you can claim and can’t claim as deductions on your tax return? Hiring an accountant or tax professional to prepare your income tax return is a very good option for thorough tax planning and ensuring you are claiming all available deductions for your small business tax return.

3. Don’t wait until your current tax provider does your 2012 tax return

There are two key tax planning strategies to focus on immediately:

• Do a tax plan now to ensure you and your small business are better off financially over the short and the long term. At FBC, we will do an assessment of your previous 3 years of tax returns which forms the basis of tax planning to minimize your tax and maximize your credits beginning now.
• Make sure your financial advisor or companies where you have investments have provided you with T3, T4A, T5, and T5008 forms as soon as possible rather than waiting until mid-April. This gives you a head start in working with your accountant or tax preparation specialist to do tax planning to reduce the amount owing on your tax return for 2012 and beyond.

4. Eliminate errors and omissions on your income tax return to avoid CRA audit and penalties

Hiring an accountant or tax professional to prepare your income tax return doesn’t excuse you of any responsibility for the accuracy of the information on your return. You could face huge penalties if CRA finds any errors or omissions in your reported income.

Under the Income Tax Act, you are responsible for providing your tax professional with complete and accurate information to prepare your annual tax return. You must disclose all sources of income for the year, including:

• Employment income and benefits, whether or not they are included on T4 slips
• Investment income, even if some is not included on T3 or T5 slips
• Income from foreign property and the value of the foreign property
• Capital gains from the disposition of property, shares, mutual funds, etc.

Any deductions you wish to claim must have been incurred to earn income and all credits must be supported by receipts and/or logs such as vehicle mileage logs.

Penalties are compounded with each year that income is not reported. If you fail to report income during this taxation year and you also failed to report income in any of the three preceding tax years, CRA could automatically impose a penalty of 10% of the amount not reported.

For knowingly making false statements, or even in unintentional situations that result in excessive errors on your tax return, you could be fined 50% of the difference between your tax payable as reported and the tax that should have been paid if you had reported correctly. In such cases, the fine will never be less than $100. These fines will also take into account tax credits that were calculated based on the income reported.

The Crown must prove that a taxpayer has been willful or grossly negligent based on the circumstances in each situation. Court rulings on taxpayer appeals have varied – sometimes the taxpayer has been found to be negligent, sometimes the accountant was found to be responsible for errors, and in other cases both the taxpayer and accountant had to bear some responsibility.

5. Use income splitting as a tax planning strategy for your small business

Income splitting is an effective tax planning tool. Low interest rates make it an ideal time to arrange non-arm’s length loans for in-family income splitting. In fact, you may never get a better opportunity.

When was the last time you could borrow money for a scant 1%? Well, that’s the interest rate prescribed by the Canada Revenue Agency (CRA) for non-arm’s length loans as of April 1 this year.

Non-arm’s length loans are usually made to a spouse, child or grandchild as a tool for splitting income between a high-tax-rate earner and a low-tax-rate earner.

A prescribed rate of 1% means that in the current calendar quarter (April 1 to June 30), you could lend your spouse money and charge him or her only 1% on the loan. If your spouse is also the low-income earner in the family, he or she might be able to reinvest the funds for a higher return than the 1% being paid on the loan – and pay less tax than you would on the income earned.

That’s what income splitting is all about: Movement of invested money and the income it generates from a high-income earner to a family member in a lower or zero tax bracket. Such a move makes a substantial difference in family taxes.

By its very nature, the success of income splitting depends greatly on early and coordinated tax planning. Both spouses should start their tax planning at the beginning of each tax year and, ideally, use the services of the same tax advisor.

By Jason Clements