As a Canadian business owner, you need to know how to handle taxes well to keep your business profitable and grow in a way that lasts. There are several legal ways for business owners in Canada to lower their tax obligations under the country’s tax system. Here are five important things that business owners can do to lower their taxes.
- Utilize income splitting
This saves taxes because money earned can be split by family members who are in lower tax brackets. This is how you can reduce the tax rate on the business pay.
- Salaries to family members:
If you decide to employ your family members to work for you then dividing the money that you will have earned is reasonable. Ensure the pay given is reasonable relative to the work that is being offered. This method helps reduce your taxable income and also allows relatives to earn money, which is useful for receiving CPP benefits and donating to RRSPs.
- Dividends to family shareholders:
If you opt for an LLC you are able to issue shares to family members and pay them dividends. The proportion of tax on dividends is less than that for salaries. However, do not forget about the Tax on Split Income (TOSI) rules that were introduced in 2018. These rules state that some of the split income is taxed at a higher rate.
- Incorporate your business
If you operate your business as a sole trader or a partner, you might not be able to claim as many deductions as when you incorporate the business.
- Lower corporate tax rates:
Small business deduction will reduce the corporate tax rate on the initial $500,000 of active business income to approximately 9% for Canadian-controlled private corporations (CCPCs). The personal income tax rates can be over 50% in some areas, and that’s a lot less than this.
- Income deferral:
If you leave money in the business as income you do not have to pay personal income taxes on it until you withdraw the money. What this implies is that the income of the corporation can grow at a lower tax rate.
- Claim all available tax deductions and credits
Optimizing all the available tax credits and deductions can reduce the taxed income to a very great extent.
- Business expenses:
Remember to include all your real business expenses such as rent, light bill, stationaries, and fees for professional services. As evidence, maintain records and papers that support your claims.
- Home office expenses:
If you work from home then the expenses like the mortgage interest, property taxes, utilities, and depreciation on the home can be deducted for the portion of the home used for business.
- Capital Cost Allowance (CCA):
This allows you to depreciate the expenses relating to business assets over a period of time. Among them, rates differ depending on the kind of asset, and the right rate must be applied to get the optimal taxes.
- Optimize your compensation strategy
There are various ways that a business person can remunerate himself and this has an impact on the total tax that will be paid.
- Salary vs. dividends:
If you work and receive a salary, you can make space in your RRSP for contributions and qualify for CPP benefits. However, dividends are taxed less and are not considered for CPP contribution. You might be able to save the most on taxes if you have a balanced plan that offers both pay and dividends.
- Bonus deferral:
If you or your company has a fiscal year that ends in a later month, you may wish to award yourselves or key employees bonuses prior to the end of the year but within 180 days of such year. The company can offset the cost of the bonuses this year, which means that they can postpone paying taxes for them for the next fiscal year.
- Health and dental benefits:
In the event that you establish a Private Health Services Plan (PHSP), you are allowed to claim all of the health care and dental care costs of yourself and your employees. This is a better approach of providing incentives and at the same time reducing the taxable income.
- Implement tax-efficient investment strategies
By putting extra money into investment that will reduce your tax bill, you get to become richer and pay fewer taxes. Think about these plans:
- Corporate investment accounts:
In case your business has some cash surplus, you might consider investing it in a corporate investment account. The income from the investments will be taxed at the company tax rate, which is often lower than the company tax rate. However, passive investment income in a CCPC can reduce the small business benefit, so one should be careful.
- Tax-Free Savings Account (TFSA):
If you are a resident of Canada, you can contribute up to $6,000 per year towards your TFSA (2020). Any money that is withdrawn or investment income from a TFSA is not taxable, making it a smart way to save and earn more money with little to no tax implications.
- Registered Retirement Savings Plan (RRSP):
If you invest in an RRSP, you can claim a tax deduction in the current year that the money was invested and earn Tax-Free Compound Interest on that amount until it is withdrawn. This is particularly useful if you believe your tax bracket is going to be lower once you change jobs.
In conclusion
Managing taxes is among the responsibilities of anyone who owns a business in Canada. Some of the ways include splitting your income, incorporating your business, claiming all deductions and credit, optimizing your pay, and making investments that are tax smart, all of which can significantly reduce your taxes and let you retain more income.
It is recommended to consult with an Airdrie tax consultant to ensure that these methods are suitable for use and that the various tax laws are being complied with. Effective tax planning does more than help you minimize your business taxes; it helps to provide your business with the right financial foundation it needs to succeed in the future.
