Last updated: Nov. 10, 2022
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 highlight some common federal tax credits for small businesses that could help you save money. First, however, let’s review the differences between tax deductions and tax credits.
How to apply tax deductions versus tax credits
Tax deductions or tax “write-offs” are allowable business expenses that reduce your taxable income, while a tax credit will directly reduce the amount of tax you must pay to the Canada Revenue Agency (CRA).
Small business tax deductions (or “write-offs”) 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.
When preparing your taxes, apply your tax deductions to your taxable income and calculate your total tax owing first; once you have your total owing, you can then apply your eligible tax credits.
Tax credits are typically calculated at 15% of the amount you paid. For example, if you paid $500 for something that is eligible for a tax credit (at 15%), you will receive $75 in tax credits.
Unlike deductions, tax credits will reduce the tax amount owing on a dollar-for-dollar basis. For example, if your total credits amount to $500, you will save $500 on your tax owing.
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
1. Investment Tax Credit – Property, Machinery, Equipment
Investment Tax Credits (ITC) allow you to claim tax credits if you invested in your small business, bought machinery, equipment, or new buildings.
What if you could have taken advantage of investment tax credits, but forgot? 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.
Since there are eligibility rules and requirements that must be met before claiming investment tax credits on property, machinery, and equipment, it’s recommended that you speak to a tax professional to ensure you’re following the rules.
2. Apprenticeship Job Creation Tax Credit
If you own a small business that 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.
3. Scientific Research and Experimental Development (SR&ED) Tax Credit
The SR&ED tax incentive program allows you to deduct scientific research and development expenses to reduce your taxable income.
Your SR&ED tax credit will be at least 15% for individuals and can be as much as 35% of your qualified expenditures for farm corporations. If you have any unused 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 for the purpose of achieving a technological advancement, and,
- The work is a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis
4. Input Tax Credit
You may be able to recover GST/HST paid or payable on purchases and expenses related to your business, by claiming input tax credits. However, you must have a registered GST/HST number to claim them.
Keep track of GST/HST paid on eligible business expenses so that you can claim them on 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 in relation to the nature of your business. According to the CRA’s website, the following expenses may be eligible for input tax credits:
- Business start-up costs
- 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 personal consumption, use, or enjoyment
If you want to learn more about tax credits and other tools to help lower your tax burden, please download our e-book Tax Preparation: A toolkit for small business owners.
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