How to Reduce Income Tax in Canada
If you are the proprietor of a business in Canada, one of the best ways to generate greater profitability is to manage your business taxes efficiently. As an entrepreneur, one of the most important aspects of running your business is ensuring that your taxes are filed and paid on time to avoid penalties or other legal actions. However, there are several ways in which business owners can legally optimize their tax payments to lower taxes and retain funds within the business. Below are some strategies that can be applied to reduce taxable income and ultimately save taxes for your business in Canada.
Track your receipts diligently
The Canada Revenue Agency does not usually allow credit card statements to be used as proof of expenditure. That means that even if you have a business credit card, you still have to ensure that you are tracking all invoices and receipts for goods and services purchased. For eligible business purchases, these can be used as income tax deductions under reasonable circumstances, thus reducing your taxable income. Investments for the business can span a wide variety of non-inventory-related items, from simple stationery to the granola bars bought as snacks for the office pantry.
Income splitting with your family
Salaries paid out are classified as a deduction. However, the salary must also be provided within the parameters of reasonable conduct. While reasonability is subjective, providing a family member with a salary of $250,000 for clerical services could well be perceived as unreasonable. When making salary payments to family members, it is important to apply the ‘arm’s length’ practice. That means having defined contracts in place with proper T4 forms.
Market your business
When marketing your business, you may opt to use an external agency or freelancer to develop campaigns that amplify your company’s brand with target customers. These advertising and marketing expenses are tax-deductible. In addition to that, even specific sales tactics that you use may be eligible for a deduction. If you have taken a client out for a meal, you can deduct that as a legitimate business expense to save taxes.
Rethink your Capital Cost Allowance
The Capital Cost Allowance (CCA) claims that business owners can deduct the cost of the depreciable property over multiple years rather than deducting the entire cost in the year that it was acquired. However, it is essential to note that the CCA is a guideline – not a mandatory tax deduction. Developing the right strategy for the CCA can be highly rewarding from a tax savings standpoint. In any particular tax year, the business owner can use as much of the CCA claim amount as they please and then carry unused portions forward to reduce future tax bills. To put it simply, if you have minimal taxable income in Year 1, but expect to ramp up in Year 2, then it might make sense to claim minimal CCA in Year 1 and then carry forward unused amounts to Year 2 to secure a larger deduction.
Home-Based Business Considerations
If you run your business out of your residence, there are certain deductions available that you can capitalize on. For business owners running their venture out of their home, expenses such as home insurance, hydro, electricity, heating, and other maintenance costs can be deducted. That’s not all. If the home is the property of the business owner, then certain amounts of mortgage interest and property tax can also be deducted.
Write off losses incurred
Losses in the business may not be great news, but they are helpful from a tax deduction standpoint. If you have had an event where the customer did not pay (i.e. a bad debt) or had to take a capital write-down on inventory or other assets, that write-off amount can be listed as a deduction to lower the tax burden at the end of the year.
Be mindful of salaries and dividends
If you own a small business operating under a corporation, you can compensate yourself through either a business salary or by withdrawing funds as dividends. Based on the external market circumstances, owner’s needs, and growth expectations of the business, each option has its own pros and cons. If an owner is looking to maximize their RRSP, it may make sense to pay a higher salary. On the other hand, a dividend has a lower personal tax rate applied to it. In addition, the expectations of the future also need to be accounted for. If the owner predicts that the upcoming year is not going to be great for the business, it doesn’t make sense to pay out a large salary where a higher tax rate will be levied.
Use a professional
Beyond just the subject matter expertise that professionals have acquired, the stamp of an accountant on a business tax return elevates the level of quality and accuracy of the filings. When working with professionals, it is vital to work with those with a deep track record within the space who can help you and your business navigate tax law seamlessly to help you maintain full legal and regulatory compliance while getting you a tax reduction.
The above tax-saving tips are some ideas on how to reduce your taxable income in a legitimate, sustainable way. However, hundreds of other strategies can be used to ensure that you are optimizing your taxes and retaining capital that can be used to grow your business further.