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Tax credits for small business owners in Canada

Last updated: May. 3, 2021 

As a small business owner, you should always take advantage of the tax credits available to you.

As tax season rolls around, you should make a point of checking what’s available to you, ensure your eligibility and that you’re applying them properly.

There are tax credits available at both the federal and provincial level but here we highlight some common federal tax credits for small businesses that you should be taking advantage of.

What is the difference between a tax deduction and a tax credit?

Tax deductions are allowable expenses that reduce your taxable income whereas 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 tax deduction on your taxable income depends on your variable tax rate.

A tax deduction must also be claimed against the income earned in the year the expense was incurred.

Once you’ve applied your tax deductions to your taxable income and calculate your tax owing, you can then apply your eligible tax credits. Tax credits will reduce this tax amount owing on a dollar-for-dollar basis.  If you are eligible for a tax credit worth $500, you will save $500 on your tax owing.

Claiming tax deductions and credits can be complicated so you should work with a professional to ensure you’re applying them correctly.

Learn more about small business tax deductions

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 to? 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 20 years (to help offset larger tax bills).

3.  Scientific Research and Experimental Development (SR&ED) Tax Credit

This 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% and can be as much as 35% of your qualified expenditures and is available to Canadian businesses of all sizes whether you’re a sole-proprietor

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.

The provincial governments and territories also support SR&ED through additional tax credits and grants.

Learn more about SR&ED Tax Credit from the Government of Canada

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 but 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.

Resource: 7 simple ways to organize your receipts

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
  • rent
  • telephone and utilities
  • travel

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

Need help?

We have been working with Canadian business owners for more than 65 years to optimize their tax returns, maximize their savings and help them keep more money in their pocket.

We’ve met a lot of business owners over the years that were paying more in taxes than they need to; money that could be better used to build their business.

Canada’s tax code is tricky because it’s constantly shifting. Our experts run the numbers until they tailor a return that maximizes your credits and minimizes your tax.

Whether you want to pay fewer taxes, stress less about payroll or get your books in order, our friendly tax and accounting experts will handle all of that for you. Any time.   Click here to book a free 15-minute consult.