Tax Planning Tips for Your Small-Medium Business

Like many Canadian entrepreneurs, you are passionate about your ideas and want to bring positive change to your community and the world. While building your business it’s just as important to focus on your taxes as it is to focus on profits and growth metrics. When it comes to running any business it’s never too early to start thinking about tax planning strategies and how to take maximum advantage of your tax bill.

Below are a few tax planning tips that can have major impacts on your yearly tax bill.

Retain receipts for all business activities

There are numerous tax deductions that are available to you and your business that will help reduce your taxes throughout the year. It may not seem like a priority to keep all your receipts following business related activities but they will add up more than anticipated. With all that said, you must ensure that you keep the original receipt as the Canada Revenue Agency does not accept any sort of credit card history as proof of your business’ expenses.

How long should you retain these receipts? 6 years minimum of your last Notice of Assessment. This is because the CRA can ask you to verify your claims in the event of an audit. Although the receipts are necessary, they can either be in physical form or you can have them digitized for easier storage.

Utilize work-from-home expenses

The majority of Canadian entrepreneurs are small business owners, many of whom operate their business out of their home, at least for a time being. This can come with many tax advantages that are important to take advantage of when applicable.

If you use the at home office on a regular or ongoing basis to meet your customers, then you can claim a percentage of your home expenses. Normally the percentage is determined by the size of your office about the total size of the home. If your office takes up 10% of the home’s total footprint, the business use home percentage would be 10%.

You can deduct a portion of all the home expenses that relate directly to operating your business, including:

  • Utilities

  • Cleaning materials

  • House insurance

  • Property taxes

  • Mortgage interest

  • Capital cost allowance

Claim non-capital losses

If your business has a non-capital loss (your expenses exceed business income) in any year, figure out which year you can use this loss to decrease your income tax bill. Non-capital losses can be used to offset income, and the loss can be carried back three years or carried forward up to 20 years.

With the help of a tax professional who has experience working with small business owners, you can decide if it makes sense to use the non-capital loss in the current tax year, carry the non-capital loss back to recover income tax you’ve already paid, or carry it forward to offset a larger tax-bill.

Ensure you manage your RRSP and TFSA contributions

Contributions to a Registered Retirement Savings Plans (RRSP) is tax deductible so you receive immediate tax relief and tax-sheltered growth. To maximize the benefits of the RRSP, you should contribute to it when you’re in a higher tax bracket. Since any unused contributions from previous years can be carried forward, it might be better to hold off on making RRSP contributions for a year where you expect to make a high income.

With Tax-Free Savings Accounts (TFSA) you won’t receive up-front tax relief, but your money accumulates tax free, including capital appreciation, bonds and other interest bearing financial products.

If you’ve maxed out your RRSP, you can put money or investments into a TFSA.

Tax Planning for Business

Incorporate Your Business

Depending on the province your business operates in and what your business actually does, incorporating the business can be a great way to access many tax deferrals. There are numerous tax benefits that are only available to those businesses that have been incorporated.For example, there is income tax splitting and capital gains exemptions when you sell the business.

A major advantage to incorporating your business is the much lower corporate tax rates that accompany them. For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 9%. By comparison, if you register the company as a sole proprietorship, you pay the personal income tax rate on all profits. In 2021, personal income is taxed as follows:

  • 15% on the first $49,020 of taxable income, plus

  • 20.5% on the next $49,020 of taxable income (on the portion of taxable income over 49,020 up to $98,040), plus

  • 26% on the next $53,939 of taxable income (on the portion of taxable income over $98,040 up to $151,978), plus

  • 29% on the next $64,533 of taxable income (on the portion of taxable income over 151,978 up to $216,511), plus

  • 33% of taxable income over $216,511

Another big advantage of incorporating a small business is limited liability. When a business is incorporated, it is considered to be a separate entity from the owner or shareholders. If your small business involves a great deal of risk, incorporating it could protect your personal assets from creditors and lawsuits.

It’s never too early to start planning for the incoming tax season. Let the professionals with over 40 years of experience handle your businesses tax planning and execution. Click here for your free consultation and find out how we can maximize your business tax advantages {Link to Contact Page}