Running a business comes with a lot of responsibilities. And, one of the most important responsibilities is paying the year-end tax to the government. While no one likes parting with a good part of their hard-earned income, income tax is mandatory and you cannot go wrong with it. Otherwise, you will have to welcome the officials of the Canadian Revenue Agency (CRA) and may also have to face consequences.
Although taxes may seem scary, they aren’t as bad as they are perceived to be. Typically, most small business owners lack time and knowledge relating to taxes. Thus, they do not have a tax strategy in place. All these factors, lead to them having a difficult time while preparing and filing for taxes.
Understanding the various aspects of taxation and forming and applying tax strategies to your business can help you reduce your troubles with taxes. What’s more, you can also improve your savings on taxes. After all, the government has provided us with various tax exemptions and tax credits.
To help you out, here are a few Canadian tax strategies to help you minimize the income tax you’ll have to pay:
There are various deductions and tax credits available to businesses. And, there are several ways in which you can enhance your tax savings. Here are a few tips to save on taxes:
The importance of filing documents systematically cannot be stressed enough. As a business owner, you have a number of responsibilities to attend to. From client meetings to legal formalities and managing finances, there are innumerable things that you got to do. And, in the midst of all this, you will neglect taking the receipt for that small parking fee you paid or a box of pen you bought on your way to the office. All such petty expenses can add up to a substantial amount over the course of a year. We understand that you’re extremely busy, but not collecting receipts can act against you. There are several office related expenses that you can claim deduction for. Collecting receipts and recording them appropriately will help you identify and claim these deductions. Plus, in case the CRA requests, you will have to provide them proof of transactions. So, never overlook the importance of taking receipts for tiny expenses.
The Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA) are excellent tax saving tools for small business owners, especially those running a partnership or a sole proprietorship. Maximizing your contributions to these can help you save a substantial amount on taxes. In the case of RRSP, the decision to maximize your contribution depends on how much your income fluctuates from year to year. The tax savings on RRSP contributions are based on the marginal tax rate. Some or even all of the allowable contribution can be carried forward into subsequent years. Hence, it makes sense to keep these contributions for the year when you earn a higher income. The TFSA helps you protect your savings and investment income from taxes. Income and capital appreciation from stocks, bonds, or other interest-bearing instruments are tax-free in a TFSA.
Depreciation cost of an asset used in the business is calculated each year for accounting purposes. Since it can be claimed through the capital cost allowance (CCA) claim, many small business owners claim it in the year that it occurs. But, they forget that the capital cost allowance is not a mandatory deduction. Since it is not a compulsory deduction, you can claim as much CCA as you want, from zero up to the maximum allowed in a particular year. And, you carry the unused amount to save on a larger income tax amount, instead of claiming it when you hardly have any taxable income. Additionally, a tax strategy that can help you maximize your CCA is to set the right time for buying and selling depreciable assets. Purchase new equipment before the end of the fiscal year and wait till the next year to sell your assets. Although you’ll be claiming only 50 percent of the normally allowable CCA, you’ll still be increasing your CCA for the tax year.
There’s no doubt that the higher your income the higher your marginal tax rate. By implementing the tax saving strategy of splitting your income, you can lower your marginal tax rate and save a substantial sum of money. You can transfer a portion of your income to a family member. Employ your spouse or your child and pay them a salary. Because of the personal tax exemption, they would be paying very little tax. And, if the salary equals the personal tax exemption, they will pay no tax at all. And, you will also cut off the specific salary amount from your income and reduce your marginal tax rate. But, make sure you have the papers in order before you implement this strategy. Consult with a tax professional to ensure you are up to date with the law changes and human resources as you should complete paperwork, just like you do when you hire an employee or contractor and keep your claims reasonable based on the job description.
Donations are considered a good act, and they also benefit you in terms of taxes. In the context of tax, donations are considered gifts for which you get no consideration in return. The charitable donations tax credit is another way to maximize your savings on taxes. But, make sure these donations are to registered or qualified charities. A registered charity is one of the several other public organizations who can issue tax receipts. Make sure you receive a receipt when you donate to these organizations. The CRA may request a proof and you should have it ready. To claim this credit, you can report it in your annual tax return. To maximize your tax credits on this, increase your donations to a registered charity of your choice for the year.
If you’re operating out of home, then here’s some good news for you! When it comes to income tax, home-based businesses have a lot of benefits. As a home-based business owner, you can claim deductions for a variety of home-related expenses like heat, electricity, home maintenance, and more that are being used for business. You can also deduct portions of your property tax and mortgage interest. If you’re a home-based business, then do not forget to claim deductions. This can help you reduce the tax burden.
If you’re a sole proprietor or a partnership, then you may want to consider incorporating your business. This is because incorporating your company can help you avail of the best-known tax advantage of Small Business Tax Deduction. In this, the income of the qualifying Canadian-held corporations is taxed at a reduced rate of 10.5 percent, as compared to other types of corporations, which are taxed at 15%. However, implementing this tax strategy requires careful consideration. Incorporating your business only makes sense if your small business is having an income, which is enough to offset the costs of incorporation. You can take help of financial advisors to arrive at a decision that best suits your situation.
You cannot avoid taxes, but it is wise to implement such strategies to minimize the tax burden and take your business to successful heights. But, make sure that you understand taxes and the related regulations surrounding your business thoroughly before implementing these tips. While you can do it yourself, it is recommended to hire a taxation service provider. This is because tax preparation and filing requires a considerable amount of time and cautious approach. With the shortage of time, there is a huge room for error. Hiring professionals can save you time and money. Plus, their knowledge and expertise in the subject also provide you the peace of mind.
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