Canadian Small Business Tax Planning Strategies

Tax strategies for Canadian Entrepreneurs

Canadian Small Business Tax Planning Strategies

For many Canadian entrepreneurs, there comes that lightbulb moment when they think of a breakthrough idea for a new product or service.

While entrepreneurs are passionate about their ideas and want to change the world, they often regret waiting too long getting started and waiting too long to sell their ideas.

This also holds true for a business plan. If you’re a Canadian entrepreneur, it’s never too early to start thinking about tax planning strategies.

Below are some top corporate tax planning tips for Canadian entrepreneurs.

Collect Receipts for Business-Related Activities

If you want to take advantage of all the available tax deductions and reduce your tax burden, you need to collect receipts for all business-related activates. And by “all” we mean ALL.

Being an entrepreneur and running a business can be time consuming, but all of your business expenses, no matter how small, add up.

Business expenses include parking fees for meeting a client, the bag of fresh coffee beans you picked up for the office, or the letters you mailed. 

Why keep the original receipts? The Canada Revenue Agency does not accept credit card statements as proof of business expenses.

If the CRA asks you to verify your claims, you need to provide the original receipts.


Take Advantages of Tax Deductions

The majority of Canadian entrepreneurs are small business owners, many of whom operate their business out of their home.

There are a lot of tax advantages when it comes to operating a business out of your home.

If you conduct more than 50% of your business from home or use the space exclusively to earn business income, then you can claim a percentage of your home expenses.

Normally the percentage is determined by the size of your office in relation to 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:

  • Office expenses (stamps, pens)
  • Telephone
  • Utilities
  • Cleaning materials
  • House insurance
  • Property taxes
  • Mortgage interest
  • Repair and maintenance
  • Internet
  • Furniture
  • Computers
  • Office equipment
  • Mobile devices, etc.

Maximize Capital Cost Allowance

If your business has a non-capital loss (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 personal income: it 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 entrepreneurs, 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.


Manage your RRSP and TFSA contributions

The Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are excellent ways for Canadian entrepreneurs to maximize their tax deductions.

How much you should contribute depends on how much your income fluctuates each year.

Tax savings from RRSP contributions are based on your marginal tax rate and since some (or all) of your allowable RRSP contributions can be carried forward, it might be better to hold off making RRSP contributions for a year where you expect to make more money.

The TFSA meanwhile, allows you to shield savings and investment income (capital appreciation, bonds, other interest bearing financial products) from taxes.

If your RRSP contributions are topped out, you can put money or investments into a TFSA.

A tax expert can help you decide which route to take.

Incorporate Your Business

Small business owners looking for ways to maximize their after-tax income and minimize what they pay in taxes might want to consider incorporating the business.

Depending on what your business does and in which province you operate, incorporating the business can lead to a deferral of taxes paid.

When you incorporate your business, you can take advantage of certain tax benefits that are not available to unincorporated businesses, such as income tax splitting and capital gains exemptions when you sell the business.

One big advantage of incorporating your business is the lower corporate tax rates.

While rates vary by province, in Ontario, an incorporated business pays a tax rate of 13.5% on the first $500,000 of annual income and 26.5% for any income over that.

By comparison, if you register the company as a sole proprietorship, you pay the personal income tax rate on all profits. In Ontario, the marginal tax rate can be more than 50%.

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.

The incorporated business owns and operates the business and is responsible for any liabilities—not the individual owner or shareholders (though the director is still liable in some cases).

If your small business involves a great deal of risk, incorporating it could protect your personal assets from creditors and lawsuits.

FBC, Helping Canadian Entrepreneurs Reduce Their Tax Burden

If you’re a Canadian entrepreneur and want to know the best tax planning strategies for your small business, talk to the small business tax consultants at FBC.

FBC has worked exclusively with small business owners, farm operators, and independent contractors since 1952. For more than 65 years, we have helped tens of thousands of clients from across Canada prepare and file their taxes.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

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