When filing your corporate tax returns, it is advisable to look into different ways to save taxes. While operating in Canada, it can deem stressful to pay a huge sum of tax, but a good corporate accountant will tell you to worry less. As per the CRA, there might still be many ways to decrease your per-year tax liability.
Hold back the tax
To help manage the financial burden of tax, it is important to consider how one is being taxed. The Canada Revenue Agency (CRA) allows you to exclude from holding any credits to be withheld if the amount has not been received by the customer and the order is incomplete when calculating your corporate tax. This allows the company to defer all tax payments on its credits to withheld amounts until a future date when the customer actually receives the amount or when the order is completed. The deferred tax liability on the items held reduces the potential financial burden of the company and the uncertainty about their recovery. It also ensures that the tax expenses incurred are consistent with the company’s operations and can improve the organization’s cash flow management as the company pays no income taxes it has not received.
Make a contribution to Canadian Pension Plan (CPP) Payments
In addition to income tax, you are required to pay Canada Pension Plan (CPP) contributions if your income exceeds $ 3,500 in any given year, even if you are self-employed. The rate for CPP contributions in 2021 is 10.9%, up to an annual maximum of $ 6,333 (if you were working for an employer, your contribution would be half the normal rate or 5.45%, and the employer would contribute the other half). When making quarterly payments, you can include an additional amount for CPP contributions based on your annual income or pay the estimated amount per year when filing your corporate tax return.
Collect receipts for commercial activities
If you want to take advantage of all the tax deductions available to you and reduce your tax burden, you must collect receipts for all business-related activities. We know you’re busy and that keeping track of your receipts may not be at the top of your list, but all of your business expenses add up, no matter how small. Business expenses include everything from online advertising and promotional materials such as business cards to the interest you pay on buying property for your business.
Claim non-capital losses
If your business has a non-capital loss in any given year (your costs exceed your business income), find out which year you can use that loss to reduce your income tax account. Non-capital losses can be used to offset income, and the loss can be carried forward for three years or carried forward for up to 20 years. With the help of a tax professional who has experience working with small business owners, you can decide whether it makes sense to apply a non-asset loss in the current fiscal year, transfer the non-asset loss back to the income tax refund you have already paid, or transfer it to settle a larger tax account.
Incorporate the business
Small business owners who want to minimize what they pay in taxes may want to consider integrating their business. Depending on what your business does and in which province you operate, incorporating your business can lead to tax deferral. When starting your business, you can take advantage of some tax benefits that are not available to unincorporated businesses, such as income tax distribution and capital gains exemption when you sell a business. The big benefit of incorporating your business is the reduction in corporate tax rates. For private Canadian-controlled companies applying the small business deduction, the net tax rate is 9%. When filing corporate tax returns, one would realize that incorporating the business was worth it.
Frequently asked questions
Will I be able to set off the overall tax hold?
Implementing this strategy in any specific year results in a tax addition in the following year (offset by a current-year tax deduction for all eligible participation credits in the current year). Note that withholding tax is a choice for the company. Consequently, it must be used constantly from year to year.
Why should I keep the original receipts of the expenses paid?
The Canada Revenue Agency does not accept credit card statements as proof of business expenses. If the CRA asks you to verify your claims, you must provide the original receipts. Keep them for at least six years from the last assessment notice, which is what the CRA requires in the event of an audit. You can keep physical receipts or digital copies.
Can my corporate tax change based on where I am registered?
The corporate tax you pay will differ based on the state you are registered in. all states have their own tax rates and rules of tax rebates and deductions as well. Your corporate tax accountant can guide you about it.
Can I deduct travel expenses as a constructor?
As a construction firm, it is understandable that one would have frequent traveling, and traveling expenses would become a big percentage of their costs after raw material; thus, it is advisable to deduct traveling expenses, which could, in turn, lower your tax expense.
Should I deduct entertainment and business expenses?
As a construction business, you can still deduct entertainment and business expense which would, in turn, reduce your tax liabilities.
Business costs that are reasonable and paid for the purpose of generating income are deductible for income tax purposes unless a special provision of the Income Tax Act allows it. Some expenses are deductible subject to restrictions (e.g., charitable donations, entertainment expenses, expenses for providing a car to employees) while filing corporate tax returns. The deduction of capital expenses is expressly prohibited, but special provisions may allow for the amortization of such expenses.