Typically, though, entrepreneurs are too busy with the day-to-day running of their business and planning for the future to focus on tax strategies for business owners. And that’s where this article comes in. Below, we list nine tax-saving tips for small businesses that could save you a tidy sum every year-end.
Employ your spouse and children
Whether you carry on your business personally or through a corporation, you should consider paying a salary to your spouse and children. Canada’s progressive tax system, which assesses higher income earners at higher tax rates, provides an incentive to split income with family members in a lower tax bracket.
Paying a salary to a spouse or child who pays tax at a lower rate than you can create net tax savings. However, be sure that their salary is reasonable for the services they provide for your business.
Incorporate your business
One of the most effective tax-saving tips for small businesses is incorporation, if your business produces more profit than you need to live on. It could produce a sizeable tax deferral by qualifying for the lower small business tax rate for active income. This deferral benefit, however, is only available if the profits are left in the company.
The longer the profits are left in the company, the larger the tax deferral. It’s important to note, however, that investment income earned on prior deferrals and rental income don’t receive this lower rate.
The tax deferral achieved through incorporation can create a permanent tax saving if the shares of the business are eventually sold and are eligible for the lifetime capital gains exemption. However, if your business makes a loss, incorporation may not be the best option, as losses would be trapped in the corporation and not available as tax offsets for personal use.
Other potential advantages of incorporation include having family members own shares (so as to have access to multiple capital gains exemptions) and paying out dividends to actively participating family members who are taxed at a lower rate.
Maximize tax breaks from RRSPs
In order to make the maximum allowable registered retirement savings plan (RRSP) contribution next year, you’ll need to create the contribution room this year by maximizing reported earned income. If incorporated, you will want to review the best dividend/salary mix for your situation.
As part of your overall plan, you may also want to make a contribution to your tax-free savings account (TFSA). It’s important to achieve a balance in your personal investment plan to ensure that it fits in with this year’s maximum contribution limits for business owners.
Don’t forget to consider RRSP contribution room when setting and reporting remuneration for services provided by family members who also work in the business.
Another good tax-saving tip for small businesses that are incorporated and have passive income over $50,000, or active business income over the small business limit, is to explore the use of an individual pension plan (IPP). An IPP is ideally suited to business owners in their mid-40s or older who have a past history of earning employment income from their company in excess of $100,000 per year.
An IPP will allow you to shelter even more earnings from tax than your RRSP, while still offering some protection from creditors.
Prepare for the sale of your business
It’s never too early to plan your business exit strategy. If you’re planning on selling all or part of your business at some point, confirm with your accountant whether you’re eligible for the lifetime capital gains exemption and what steps need to be taken.
Claim your R and D expenses
When looking at how to how to save income tax in your business, it’s important to know that research and development expenses can bring a considerable tax break. Any cash invested in new products and production processes may qualify for valuable tax incentives in the form of refundable and non-refundable tax credits.
The Scientific Research and Experimental Development (SR&ED) tax incentives encourage Canadian businesses of all sizes and in all sectors to conduct research and development. Depending on the size and type of your business, these incentives could be a deduction against income or refundable or non-refundable investment tax credits.
You can offset your SR&ED expenses against income for tax purposes either in the year you incurred them or in future years.
Your investment tax credits could be worth between 15% and 35% of your qualified SR&ED expenditures. If you have excess investment tax credits, you might qualify for a refund. They can also be carried back three years or forward 20 years.
Other investment tax credits
Apart from R and D, there are a number of other expenses that are eligible for investment tax credits.
These include new buildings, machinery and equipment when used in certain parts of Canada, in qualifying activities. These include farming, fishing, logging, manufacturing and processing.
You could also qualify for investment tax credits for mining exploration expenses and the costs of opening a licensed childcare facility for your employees’ children.
If you have a home office, claim deductions
If you have a small business and work from out of your home, you can claim a portion of your household expenses. These could include:
- Rent or mortgage interest
- Property taxes and utility bills
- Home insurance
- Hydro and natural gas
If you use your own car for work reasons, you may also be able to claim some of those expenses as well. Talk to your accountant or tax professional to find out how much you could claim.
If you employ apprentices, you can claim a tax credit
The Apprenticeship Job Creation Tax Credit allows you to claim 10% of any eligible apprentice’s salary, up to a credit of $2,000 per year, per apprentice.
An eligible apprentice is an employee whose contract is registered under a government apprenticeship program and who works in a prescribed trade in the first two years of their apprenticeship. You would need to claim the tax credit on line 41200 on your individual tax return and file form T2038.
Invest excess cash
Since personal tax deferral is accomplished by leaving profits in the company, the question to ask yourself is: what do you want to do with those profits? If paying down debt or reinvesting in the business operations are not options, then a smart investment plan is your best alternative.
This strategy is most effective for active business income subject to the small business deduction (whereby your business pays a reduced rate of tax on the first $500,000 of income).
Discover more strategies for small businesses
Your IG advisor can help with small business tax planning and come up with strategies to reduce your business taxes. However, that’s just the tip of the iceberg of what they can do for you.
They can also suggest strategies that will help improve the day-to-day running of your business, grow your business, attract the best employees and maximize your profits. They can also help you ensure your business and personal financial plans are synchronized and optimized.
Talk to your IG advisor today to discuss ways to minimize your business taxes and maximize your business’s success. If you don’t have an IG advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.