Running a business requires you to be a jack of all trades. While you may be an expert in your core business, it is not enough. Accounting, taxation, and all those number crunching are a part of the business owners’ job. If your business revenue is growing, but your profit line is thinning because of the hefty tax bill, it’s time you revisit your tax filing. You are probably missing out on the many tax benefits the Canada Revenue Agency (CRA) offers small business owners.
Tips Small Business Owners Can Use to Reduce Their Tax Bill
This article will examine some tax planning tips to reduce your tax bill. You may or may not be following them all, but it is better to put a tick against them in case you missed out on any.
Maximize RRSP Contributions
Even though you are a business owner, you can contribute to a Registered Retirement Savings Account (RRSP) and deduct the contribution from your taxable income. As business income keeps fluctuating, you can plan out your contributions accordingly. You can leave the RRSP contribution unused in low-income years and carry it forward to the following year. In high-income years, you can use the unused contribution room and invest in RRSP to reduce your taxable income. Remember that the early withdrawals are subject to withholding tax. So invest only the amount you don’t need in the short term.
Pay Salary and Dividend to Spouse and Children
As a business owner, you hire employees to run the business. No law prevents you from hiring your family members. But ensure they actively work and contribute to the company and that their salary meets industry standards. You can show this salary as an expense in your business and reduce your taxable business income. You can also avail yourself of the minimum tax bracket of your family members to withdraw more amounts at a lower tax bracket.
For instance, withdrawing $100,000 under your name will put you under a higher tax bracket. However, withdrawing $45,000, $35,000, and $20,000 under family member names (as salary or dividends) can put all three of you in lower tax brackets.
Collect Receipts of Business Expenses
Every business incurs expenses to earn revenue. Some expenses include raw material purchases, stationery, office utility bills, rent, office vehicles to deliver goods, payments to suppliers, advertising costs, hiring external accountants and tax consultants. Any expense you can say has helped you generate revenue is considered a business expense. It is better to save the receipts for each of these expenses.
The CRA does not count credit cards or bank statements as valid proof of your business expenses. Hence, it would be best to have receipts to deduct those expenses from your revenue and reduce your taxable business income. You should store these receipts for at least six years, as they could be helpful if you face a CRA audit. The CRA wants to ensure you are claiming genuine expenses and not inflating them to avoid paying taxes. A skilled accountant can help you claim the eligible business expenses.
Home Office Claim Deductions
If you work from home and have created a workspace in a small portion of your house, you can deduct home expenses up to that portion. For instance, you have converted 28% (200 sq.ft.) of your 700 sq ft. apartment into an office. You can deduct 28% of your house rent or mortgage interest, utility bills, home insurance, maintenance, and property tax as business expenses from your taxable income. Again, you must collect the receipts and keep them safe if the CRA investigates your tax filing.
Scientific Research and Experimental Development Expenses
If your business requires research and development (R&D) in science and technology, you can avail yourself of a tax deduction. Note that social science and market research are not eligible for this benefit. The CRA allows individuals, partnerships, and businesses of all sizes to deduct Scientific Research and Experimental Development (SR&ED) expenses from their taxable income.
However, if your business is not making much profit, you can avoid deducting the R&D expense, paying tax, and claiming a refund. The CRA will review the claim and refund 15-35% of the expense as an investment tax credit (ITC). You can carry forward unused ITC for 20 years and use it when your business income is high.
There are several tax benefits for specific expenses. A professional accountant can help you avail yourself of the benefits you qualify for.
Claiming Business Losses
While there are years of high income, there are also years when you incur a loss as business expenses exceed business income. You can carry forward these capital losses for up to 20 years or carry back three years to offset high income. However, continued losses for several years could raise suspicion and trigger a CRA audit. So, balance your business losses and other benefits you can carry forward and generate a stable taxable income over the years.
Note that business loss should not be due to significant capital spending, like buying a vehicle or a property. This capital spending is expensed as depreciation over a period.
Incorporating a Business
The ultimate tax tip is to incorporate a business. Canadian-controlled private corporations (CPCC) can claim a small business deduction, in which you are taxed 9% on the first $500,000 business income. Several other benefits are associated with incorporation, but it also comes with significant administrative work. The tax savings should be greater than the administrative cost. Hence, incorporation should be planned wisely and not in a rush.
Contact Black and Gill LLP in Etobicoke to Help You with Business Tax Filing
A professional accountant can help you reduce your tax bill significantly and enhance the financial efficiency of your business by highlighting areas where you can save money. An accountant can do much more than file your taxes and prepare year-end financial statements. To learn how Black and Gill LLP can provide you with accounting and tax planning, contact us online or at 416-477-7681 to learn more about how we can help you and your business.