Last updated: May. 3, 2023
When you’re a small business owner, every dollar counts. That’s why it’s so important to use every tool available to lower your tax burden, including tax credits.
Below, we review the differences between tax deductions and tax credits and highlight some common federal tax credits that may help your small businesses save money.
How to apply tax deductions versus tax credits
Tax deductions or tax “write-offs” are allowable business expenses that lower your taxable income before tax is applied. A tax credit will directly reduce the final amount of tax you must pay to the Canada Revenue Agency (CRA).
Small business tax deductions include business expenses such as rent, office supplies, advertising, and promotion. The total impact of the deduction on your taxable income depends on your variable tax rate – this means it will always be calculated as a percentage. You are also required to claim tax deductions in the same tax year the expense was incurred.
In general, tax credits are calculated as a percentage of the total amount you paid. For example, let’s say your unincorporated small business donates $150 to a charitable organization. You would be eligible for a federal charitable tax credit of up to 15% of that amount or $22.50.
Unlike deductions, credits reduce the tax amount owing on a dollar-for-dollar basis. For example, if your total tax credits combined equalled $100, you would subtract $100 from your total tax owed.
To learn more about small business tax deductions, please read Top small business tax deductions. To learn more about tax credits, please keep reading.
Tax credits for small business
Investment Tax Credits
According to CRA rules, small business owners may be eligible to claim one of the following investment tax credits (ITC) if any of the following applies:
- You bought certain new buildings, machinery, or equipment and they were used in certain areas of Canada in qualifying activities such as farming, fishing, logging, manufacturing, or processing (see Atlantic investment tax credit)
- You have done work that qualifies for scientific research and experimental development (SR&ED) tax incentives (see Scientific research and experimental development tax incentive)
- You employ an eligible apprentice and want to claim an Apprenticeship Job Creation Tax Credit
- You have unclaimed credits earned in the last 10 years
What if you qualified for investment tax credits, but did not claim them? You can carry forward credits earned in tax years that end after 1997 for up to 20 years. You can also carry back the credit you earn for up to 3 years. You may be able to claim a refund of your unused ITCs as well.
There are eligibility rules and requirements that must be met before claiming investment tax credits, so consult a tax professional to ensure you’re following the rules.
Here is some additional information about the most common ITCs:
1. Atlantic Investment Tax Credit
This credit support investments in qualified property – like equipment, buildings, and machines – mainly used for farming or fishing, logging, manufacturing, processing, storing grain, or harvesting peat.
Investments in newly acquired property used mainly in Atlantic Canada and the Atlantic Region are calculated using a specified percentage of 10%. If you have a manufacturing or processing business in that region, please visit the CRA website for more details.
2. Scientific Research and Experimental Development Tax Credit
The Scientific Research and Experimental Development Tax Credit (SR&ED) program allow you to deduct scientific research and development expenses to reduce your taxable income.
Your SR&ED investment tax credit will be at least 15% for individuals and can be as much as 35% of your qualified expenditures for corporations. As with any ITCs, you can carry them back 3 years or forward 20 years and apply them against tax payable for other years.
According to the CRA, to claim the Scientific Research and Experimental Development (SR&ED) investment tax credit (ITC), the work must meet two requirements:
- The work is conducted for the advancement of scientific knowledge or to achieve a technological advancement, and,
- The work is a systematic investigation or search that is carried out in a field of science or technology utilizing experiment or analysis
For more information on the SR&ED, you can consult the CRA guidelines. Depending on where you live, you may also qualify for additional tax credits and grants through provincial governments and territories.
SR&ED tax credits have many complex rules around eligibility. As always, it’s best to talk to a tax professional before applying them or incurring expenses that may not qualify for the credit.
3. Apprenticeship Job Creation Tax Credit
- If your small business has hired an apprentice, you can claim 10% of their wages, up to a maximum of $2,000 per eligible employee.
An eligible apprentice is someone who works for you in a qualifying trade in the first two years of their field of expertise. Any unused credit can be carried back 3 years and carried forward up to 20 years (to help offset larger tax bills).
To learn more about this tax credit, please visit the CRA website.
Charitable Tax Credits
If you’re an unincorporated small business, you will receive a tax credit for any charitable donations.*
Before making a charitable donation, you should determine the eligible amount you can claim and confirm that the registered charity meets all CRA requirements.
For example, Ramona’s unincorporated real estate business donates $1,000 to a local theatre company which is also a registered charity. As a “thank you,” they give her free tickets to a show that are valued at $150. In this case, Ramona has received an advantage of $150 and therefore the eligible amount of the gift is only $850 ($1,000 – $150 = $850).
According to the CRA, once you determine your donations are eligible, in any one year you can claim:
- Donations made by December 31 of the applicable tax year
- Any unclaimed donations made in the previous five years
- Any unclaimed donations made by your spouse or common-law partner in the year or the previous five years.
You can claim eligible amounts of gifts up to a limit of 75% of your net income; gifts of certified cultural property or ecologically sensitive land can be claimed up to 100% of your income.
There are two charitable tax credits: one rate for the federal government and one rate for the province or territory in which you live. Use the charitable donation tax credit rates table to calculate your credit.
The CRA provides the following example to illustrate how this calculation works. A donor in Alberta with a taxable income of $40,000 donates $700 in 2022. Their tax credit is calculated as the total of:
|Federal credit calculation
|Tax credit value
|15% on the first $200
|29% on the remaining $500
|Total federal credit
|Provincial credit calculation
|Tax credit value
|10% on the first $200
|21% on the remaining $500
|Total provincial credit
|Total federal credit
|Total provincial credit
|Total charitable tax credit
The total charitable donation tax credit for 2022 in this example is $300. To learn more about how to calculate your charitable tax credits and see other examples, visit the CRA website.
*Please note, charitable donations are a Division C tax deduction for incorporated businesses. If you have any questions about donations and their tax implications, please speak to a tax professional.
Input Tax Credit
If you have a registered GST/HST number, you may be eligible to recover GST/HST paid or payable on purchases and expenses related to your small business, by claiming input tax credits.
To claim this credit, keep track of GST/HST paid on all eligible small business expenses so that you can claim them when you file your GST/HST return. Be sure to keep your receipts should you be required to back up your claims.
What expenses are eligible for input tax credits?
To claim an input tax credit, the expense(s) must be reasonable in quality, nature, and cost as it relates to the nature of your small business. According to the CRA’s website, the following expenses may be eligible for input tax credits:
- Business-use-of-home expenses
- Delivery and freight charges
- Fuel costs
- Legal, accounting, and other professional fees
- Maintenance and repairs
- Meals and entertainment (allowable part only)
- Motor vehicle expenses
- Office expenses
- Telephone and utilities
The following expenses are NOT eligible for the input tax credit:
- Certain capital property
- Taxable supplies of property and services bought or imported to make exempt supplies of property and services
- Membership fees or dues to any club whose main purpose is to provide recreation, dining, or sporting facilities (including fitness clubs, golf clubs, and hunting and fishing clubs), unless you acquire the memberships to resell in the course of your business
Property or services you bought or imported for your non-business consumption, use, or enjoyment
Free Download: Year-End Tax Planning Strategies for Your Small Business
Many small business owners wait until spring to start thinking about their taxes, but this simple act of waiting could cost them thousands.
Fall is actually the best time to start think about your taxes. It allows you to get organized and assess what actions you can take before the end of the tax year to lower your future business or corporate income taxes.
Consider this toolkit your roadmap to help you get organized, reduce your tax burden, and keep more money in your pocket.
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