Last updated: Jun. 6, 2021
For many Canadian entrepreneurs, there comes that lightbulb moment when they think of a breakthrough idea for a new product or service.
While small business owners are passionate about their ideas and want to change the world, they often regret waiting too long to start their business, or come up with a business plan.
It’s the same with a tax plan. It’s never too early to start thinking about tax planning strategies and how to bring down your tax bill. Especially while you still have time to make positive changes to your tax situation.
Below are some top tax planning tips for Canadian small business owners.
Collect receipts for business-related activities
If you want to take advantage of all the tax deductions available to you and reduce your tax burden, you need to collect receipts for all business-related activities.
And we know you’re busy, and that keeping track of your receipts may not be at the top of your list, but all of your business expenses add up — no matter how small.
Business expenses include everything from online advertising and promotional materials like business cards, to interest you pay on buying property for your business. Read our list of top small business tax deductions so you don’t overlook any business expenses.
Why keep the original receipts? The Canada Revenue Agency doesn’t accept credit card statements as proof of business expenses.
If the CRA asks you to verify your claims, you need to provide the original receipts. Hang onto them for at least six years after your last Notice of Assessment, which is as far back as the CRA will ask for them in the event of an audit. You can keep physical receipts or digital copies. RELATED: 7 simple ways to organize your receipts.
Take advantage of business-use-of-home expenses
The majority of Canadian entrepreneurs are small business owners, many of whom operate their business out of their home.
There are tax advantages to having a workspace in your home.
If the workspace in your home is the principal place of business, or you use it on a regular and ongoing basis to meet your customers, then you can claim a percentage of your home expenses.
Normally the percentage is determined by the size of your office in relation to the total size of the home. If your office takes up 10% of the home’s total footprint, the business use home percentage would be 10%.
You can deduct a portion of all the home expenses that relate directly to operating your business, including:
- Cleaning materials
- House insurance
- Property taxes
- Mortgage interest
- Capital cost allowance
Claim non-capital losses
If your business has a non-capital loss (your expenses exceed business income) in any year, figure out which year you can use this loss to decrease your income tax bill.
Non-capital losses can be used to offset income, and the loss can be carried back three years or carried forward up to 20 years.
With the help of a tax professional who has experience working with small business owners, you can decide if it makes sense to use the non-capital loss in the current tax year, carry the non-capital loss back to recover income tax you’ve already paid, or carry it forward to offset a larger tax-bill.
Manage your RRSP and TFSA contributions
The Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are excellent ways for Canadian entrepreneurs to maximize their tax deductions.
How much you should contribute depends on how much your income fluctuates each year.
Contributions to an RRSP are tax deductible so you receive immediate tax relief and tax-sheltered growth. To maximize the benefits of the RRSP, you should contribute to it when you’re in a higher tax bracket. Since any unused contributions from previous years can be carried forward, it might be better to hold off on making RRSP contributions for a year where you expect to make a high income.
With the TFSA you won’t receive up-front tax relief, but your money accumulates tax free, including capital appreciation, bonds and other interest bearing financial products.
If you’ve maxed out your RRSP, you can put money or investments into a TFSA. Find out when it’s beneficial to use a RRSP or TFSA depending on your income level.
Incorporate Your Business
Small business owners looking to minimize what they pay in taxes might want to consider incorporating their business.
Depending on what your business does and in which province you operate, incorporating the business can lead to tax deferrals.
When you incorporate your business, you can take advantage of certain tax benefits that are not available to unincorporated businesses, such as income tax splitting and capital gains exemptions when you sell the business.
One big advantage of incorporating your business is the lower corporate tax rates.
For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 9%.
By comparison, if you register the company as a sole proprietorship, you pay the personal income tax rate on all profits. In 2021, personal income is taxed as follows:
- 15% on the first $49,020 of taxable income, plus
- 20.5% on the next $49,020 of taxable income (on the portion of taxable income over 49,020 up to $98,040), plus
- 26% on the next $53,939 of taxable income (on the portion of taxable income over $98,040 up to $151,978), plus
- 29% on the next $64,533 of taxable income (on the portion of taxable income over 151,978 up to $216,511), plus
- 33% of taxable income over $216,511
Another big advantage of incorporating a small business is limited liability. When a business is incorporated, it is considered to be a separate entity from the owner or shareholders.
The incorporated business owns and operates the business and is responsible for any liabilities—not the individual owner or shareholders (though the director is still liable in some cases. Talk to a tax professional about exceptions).
If your small business involves a great deal of risk, incorporating it could protect your personal assets from creditors and lawsuits.
Free Download: The Ultimate Guide to Incorporated Small Business in Canada
Many incorporated business owners feel intimidated by the demands of tax season and the corporate filing requirements of the Canada Revenue Agency (CRA). This is completely natural.
While there are numerous benefits to incorporation, it also comes with complex obligations. The complexity and administrative burden of these requirements leave many businesses struggling to keep up.
That’s why we’ve created “The Ultimate Guide to Incorporated Small Business in Canada”. Not only will it help you get organized for tax season, but it will help you make sense of your obligations under a corporate structure and to take advantage of the benefits!
Need help with your business tax filing obligations?
For more than 65 years, we have worked with tens of thousands of farm and small business owners across Canada. We optimize their tax returns, maximize their tax savings and support their back office needs with bookkeeping and payroll. Our legal services including minute book filing and annual returns.
To find out more about how we can support your business, take 15 minutes to connect with us so we can get to know each other. Request a consultation here.