How To Be a Successful Small Business Owner in Canada

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.
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1. Know your expenses

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.

 

2. Keep track of your money

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.

 

3. Consider paying income taxes every month

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.

 

4. Maximize RRSPs

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. 

 

5. Paying salary to your family (Income Splitting)

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.

 

6. SALARY VS. DIVIDENDS 

Under perfect integration, a business owner should be indifferent between taking a salary or dividends because the same amount of tax will be paid either way. In the case of a salary, the corporation can claim a deduction to reduce its taxable income. Instead, the salary is taxed in the hands of the business owner at his or her marginal personal tax rate. In the case of dividends, corporate income tax is paid on the corporately-earned income and the after-tax amount is paid out as a dividend. This dividend is then taxed in the business owner’s hands at the preferred tax rate for dividends, taking into account the “gross-up” and dividend tax credit system. Under perfect integration, the total personal income tax paid by a business owner on a salary should be equal to the combined personal and corporate income tax paid where the remuneration is taken in the form of a dividend.

 

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	$ -