Small business owners in Canada are allowed a variety of means to improve their tax situation. However, it can be difficult for the small business owner or entrepreneur to learn about Canadian small business tax rules. As a result, Copetti & Co has compiled a list of some of the most commonly used or frequently applicable tax tips to consider when growing your business.
________________________________________
________________________________________
Small business owners can claim expenses as a tax deductions under reasonable circumstance. Keep track of your kilometers as they can be used as a tax deduction as well as the gas consumed for business travel. Depending on the nature of your work, eligible deductibles are materials and supplies, technology (hardward and software), rent, travel and courses and training sessions. If it can be justified as relevant to your business include it and usually a good accountant will find a place for it in your return.
If you are in a situation where you are just starting your business, plan for proper allocation of funds. For example, for every dollar earned, 20% is set aside for taxes, 10% for expenses, 10% for marketing and so on. If you can live on the percentage that you leave for yourself then your business will have an easier time scaling.
As a rule, kept all your receipts for at least 7 years. Although you might still win a case without a receipt, you would have to go to many unnecessary lengths. Some small business owners even leave notes on the back of their receipts to serve as reminders.
If you don’t like a big bill at the end of the year, consider paying income taxes monthly. Figure out a reasonable about that you anticipate and make that payment every month. You might even get a refund at the end of the year.
In order to do this, you can inquire with the CRA. It is possible to set them up as an online vendor.
Make a contribution each year to your RRSP (Registered Retirement Savings Plan) to the maximum amount allowed for the year. Your RRSP limit for the current year is shown on your previous year’s Notice of Assessment.
RRSP contributions are tax deductible, and any income and gains earned inside a RRSP are not taxable. This allows for tax savings upon filing your personal tax return, and tax-free growth of your retirement savings. Follow this strategy, and watch your RRSP portfolio grow overtime.
Tip:
Do not over contribute to your RRSP. In other words, your contributions should not exceed your RRSP Limit. Over contributions are subject to a 1% monthly penalty for each month that the over contribution remains in the RRSP.
The key is reasonable conduct. Any salary paid out will count as a business deduction. However, the salary must reasonably match the services provided. Something such as a $1,000,000 salary for simple administrative services may be seen as unreasonable to many. You should treat family member salary as if they were an “arms-length” employee. Make sure to re-assess your family business’ organizational structure, especially when the new small business tax proposals come into effect.
Chart 1
Theoretical Integration of Income Earned
Personally vs. Inside a Corporation
Earned personally by individual | |
---|---|
Personal income | $1,000 |
Income tax | (435) |
Net cash to individual | $ 565 |
Earned through a corporation | |
Corporate income | $1,000 |
Small business corporate tax | ( 200) |
Net cash retained after tax | $ 800 |
Dividend payable | $ 800 |
Net personal tax on dividend | ( 235) |
Net cash to business owner | $ 565 |
Conclusion | |
Cash - Personal | $ 565 |
Cash - Corporation | ( 565) |
Net advantage | $ - |