- March 4, 2023
- Posted by: Aura Finance
- Category: Finance & accounting
If you are the proprietor of a business in Canada, one of the best ways to generate greater profitability is to manage your business taxes efficiently. As an entrepreneur, one of the most important aspects of running your business is ensuring that your taxes are filed and paid on time to avoid penalties or other legal actions. However, there are several ways in which business owners can legally optimize their tax payments to lower taxes and retain funds within the business. Below are some strategies that can be applied to reduce taxable income and ultimately save taxes for your business in Canada.
- Like most other places, if you live or earn income in Canada, you will have to pay income tax.
- Canadian tax law allows for several ways to reduce your taxes owed if you know the current rules and can take advantage of them.
- Contributing to a retirement plan, deducting interest, and small business credits can all help. Always check with a professional accountant when in doubt.
- Borrow to Invest, Save to Buy – The days of debt-free living have pretty much come to an end and almost everyone in the country is carrying some type of debt.
Surprisingly though, the right kind of debt can help make a small dent in your tax bill. A car loan or credit card debt incurred to buy that new sofa you’ve had your eye on, however, is not the right type of debt. A loan used to purchase an investment is. The reason is that the interest on loans taken out for the purpose of investing is tax deductible. The interest on anything else you assume to debt to buy is not.
From a tax perspective, you’re better off using cash or savings for these discretionary purchases and then borrowing to invest rather than the converse. However, as far as your personal finances go, no debt is the best kind of debt.
- Keep complete records – Be diligent about your record-keeping to avoid lost receipts which can mean missing out on tax deductions. Keeping electronic copies of scanned receipts can help you stay organized on the go, but file your hard copies as well in case you get audited.
- Marriage Maneuvers – Income splitting with your spouse or contributing to their retirement account will help reduce your tax bill, especially if there is a large gap between your incomes. However, this will require professional assistance to structure contributions in a way that will withstand an audit.
- Hire a family member – As far as tax planning goes, the benefits of hiring your spouse or child and paying them a salary are two-fold: a family member’s employment income is tax-free up to the basic personal amount (i.e. the “basic personal amount”), and their salaries count as a tax deduction for your business. Just make sure salaries are reasonable and you keep a paper trail to prove the work was performed.
- Separate personal expenses – Make it a habit to pay for any business-related expenses with a separate business credit or debit card. You’ll simplify your record-keeping and potentially avoid a red flag with the CRA. If an expense falls under a grey area, like a bathroom issue for your home office, be sure to note how it relates to your business on the receipt.
- Invest in RRSPs and TFSAs – Tax-advantaged savings plans are a smart way to save for retirement and lower your tax bill. A Retirement Savings Plan (RSP) will allow you to shelter your savings from tax; while a Tax-Free Savings Account (TFSA) lets you withdraw money without penalty.
- Write off losses – If you’ve ever had a non-paying customer, experienced a capital loss or your business was targeted for theft, you can include those losses as legitimate tax deductions.
- Deduct home office expenses – Things like utilities, internet charges and stamps are often missed by business owners who run a home-based business or use a home office. The CRA requires you to calculate the percentage of your home space allocated for business use to determine the portion you can claim for rent, mortgage interest, utilities and other expenses.
- Claim moving costs – If you moved at least 40 km to run your business/ employment, you could claim a number of related costs including transportation and storage fees, realtor commissions, and charges for connecting or disconnecting utilities.
- Start a Business – Owning a business allows you to deduct expenses you incur to help you earn an income. These could include the business use of your car, home office, salaries paid to your kids, and any supplies you use to provide goods or services. This advice is often suggested as a way to reduce your taxes.
- Capital Cost Allowance – The Capital Cost Allowance (CCA) claims that business owners can deduct the cost of the depreciable property over multiple years rather than deducting the entire cost in the year that it was acquired. However, it is essential to note that the CCA is a guideline – not a mandatory tax deduction. Developing the right strategy for the CCA can be highly rewarding from a tax savings standpoint. In any particular tax year, the business owner can use as much of the CCA claim amount as they please and then carry unused portions forward to reduce future tax bills. To put it simply, if you have minimal taxable income in Year 1, but expect to ramp up in Year 2, then it might make sense to claim minimal CCA in Year 1 and then carry forward unused amounts to Year 2 to secure a larger deduction.
- Childcare expenses – If your child is going to daycare, you may be able to claim a deduction. Childcare expenses include daycare centres, summer camps, overnight boarding schools, and caregivers such as nannies. Generally, childcare expenses must be deducted by the spouse with the lower income.
- Medical & charitable expenses – You may receive a partial deduction for charitable donations and certain medical expenses, including any medical cannabis products you purchased as a patient. Spouses should consider pooling contributions on one spouse’s tax return for maximum benefit.
- Canada Workers Benefit- If you’re a low-income worker, you can claim the Canada Workers Benefit (CWB) when you file your taxes. The refundable tax credit provides up to $1,395 for single individuals and $2,403 for families. It also includes a disability supplement if you have an approved Disability Tax Credit Certificate (Form T2201) on file with the CRA. If you qualify, you can request an advance payment, which allows you to receive half of your benefit in four separate payments.
- Use a professional – Beyond just the subject matter expertise that professionals have acquired, the stamp of an accountant on a business tax return elevates the level of quality and accuracy of the filings. When working with professionals, it is vital to work with those with a deep track record within the space who can help you and your business navigate tax law seamlessly to help you maintain full legal and regulatory compliance while getting you a tax reduction.
A final tip: an accountant can potentially save you money by identifying tax deductions you may not know about. Consider working with an accountant familiar with your particular type of business.
Disclaimer – This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please seek professional advice to discuss these matters in the context of your particular circumstances. Aura Finance Inc., its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.