Thinking of initiating a Small business in Canada but confused due to the high-income taxes you may have to pay or do you already have a small business and fed up with paying high tax rates? Well, the good news is you can in fact lower your taxes on Small business in Canada, this guide will offer you some top strategies on exactly how to do that, pay less tax and keep more money within your business.
If you are already running or planning to run a small business you have a higher chance of availing of the low tax rate, if you have a proprietorship or partnership and are filing your income tax using a corporate tax return, these exceptions apply to you.
So here is how you can enjoy paying fewer taxes and retaining higher income:
1. Income Splitting
The more you earn the higher the tax you have to pay, so, if you wish to pay lower taxes in Canada you can transfer some of your income to a member of your family who is earning an income that is comparatively much lower, this can be your partner, your child or anyone else that you deem fit, this will help reduce the tax rate on your earnings.
This is a strategy popular amongst those who own small businesses, file corporate tax returns, and have children that attend high school. If we were to imagine a situation the most applicable would be if your wife helps you out with the business you can pay her a salary that may amount to $10,000, your wife would have to pay very little tax because she would be exempted from a basic personal income, so it’s a win-win situation you can pay a lower tax while your wife gets a salary.
You must make sure that the salary you decide for your family member is a realistic amount and does not seem obvious that you are trying to evade tax, you must also complete the paperwork just as you would for a regular employee, with an invoice and salary slips. You need to make sure that you don’t do anything silly that can attract the attention of the CRA.
2. Home Office Deduction
Is your small scale business home-based? If this is the case you may be eligible for tax deductions, if your business can be set at home you can enjoy the advantages that home-based businesses have to offer, not only are you entitled to pay lower taxes you can even deduct certain expenses this includes expenses such as electricity bills, heating bills and even home insurance, you can even deduct your mortgage interest and property tax from your income, therefore, saving you yet again from having to pay heavy income taxes.
3. Automobile Deduction
This can be more difficult than it sounds but if you have a bookkeeper he/she may be able to help you, it is important to keep all your receipts safe even if it’s just little expenses like filling the gas tank or paying a parking fee when you make an official visit, this may sound like pennies but over the course of the year it will add up as a lot, you can maximize your corporate taxes by keeping all your receipts. You must make sure that there you have recorded the receipts in a manner that is deemed appropriate and is acceptable by the CRA.
4. Donation Deduction
You can increase your tax deduction by giving out charitable donations to charities that are registered in Canada; this will increase your deduction of corporate tax.
5. Small Business Deduction
Business incorporation is often practiced in order to reduce taxes, sole traders may incorporate their business with partners because they can avail many tax advantages from such incorporation of the business. One of the commonly known advantages is known as Small business deduction for small businesses. According to Canadian tax law, Small enterprises are taxed less compared to other corporations, they can enjoy the advantage of a special small business deduction.
You can only enjoy this type of tax reduction if you are growing at a significantly worthwhile pace. You must have an ample income from your corporation and on top of that, you must also have some savings in your corporation which you can show as the earnings of your business if you wish to benefit from the corporate tax deferral.
If you wish to avail any of the above-mentioned advantages attached to Small scale businesses and pay fewer taxes the first and most important factor is that you keep accurate accounts of your income, you must remain on top of your record-keeping at all times otherwise your reduced taxes and corporate tax returns could be highly affected, in fact, you may even attract the attention of the CRA. You must make it number one on your to-do list to keep your records organized and in check throughout the year. In fact, it is advisable that you hire a bookkeeper to do it for you as they will ensure that everything is in order, on time, organized and regular.