Top 10 Small Business Strategies to Reduce Income Tax in Canada
Tax season can be a frustrating time for Canadian small business owners, especially in a struggling economy. Although you cannot avoid income taxes completely, you may be able to reduce or defer your payments using some simple tax reduction strategies. This article is designed to introduce you to ten strategies that small business owners like yourself can use to reduce your income tax payment this year and to help you keep more of that hard-earned money in your pocket.
Tip #1. Collect Business-Related Expense Receipts
Maybe you spend money on gas or parking fees while visiting a business partner, bought new staplers for the office, or even purchased stamps and envelopes to mail out business-related letters. Business-related expenses like these are very common and easily overlooked but collecting and filing these receipts can help you reduce your income tax payments. By saving these receipts you may find that your expenses pile up quickly, so make sure to maximize your income tax deductions by reporting them this year.
Tip #2. Claim Charitable Income Tax Credits
Help out others and maximize your charitable income tax credit by donating to your favorite registered Canadian charities. Donations over $200 are assessed at a more favorable rate and thus provide you with a larger credit, so manage your income appropriately to both support a worthy cause and give yourself the more favorable tax credit available.
Tip #3. Split Income
In Canada, when your income is higher, so to is your marginal tax rate. The simplest way to reduce your income tax is to take a portion of your income and transfer it to a spouse or a child who has a lower income. This method allows you to reduce the marginal tax rate on your income and save!
Tip #4. Incorporate Your Business
Incorporation offers many tax advantages, not the least of which is a reduced corporate net tax rate. Canadian small business owners who have not incorporated their businesses pay 19.5%, while small business owners who have incorporated their businesses pay 11%.
Tip #5. Use-Of-Home Deduction for Small Businesses
If you operate your small business wholly or partially out of your home, there are significant opportunities for you to decrease your income tax payments through both the Business Use-of-Home Deduction and the Home Business Tax Deduction. If you own your home, you may even be able to deduct mortgage interest and property tax payments.
Tip #6. Registered Retirement Savings Plan
Managing your RRSP is a great way to lower your small business income tax. Estimating how much income you will make in a year and planning your RRSP investments can provide you with large tax deductions. In small income years, a smaller investment might be necessary, but in larger income years, you’ll want to maximize your savings opportunities by making larger contributions.
Tip #7. Deduct Interest and Fees on Borrowed Funding
If you have received a loan to start your small business, it is possible that you can deduct some or all of the interest. Appraisals, legal fees, fees to reduce interest rates and other qualifying options can be used to lower your income tax payments.
Tip #8. Claim Insurance Business Expenses
Although life insurance cannot be deducted, insurance carried on buildings, land, equipment, and machinery can be deducted in whole or in part. This commonly overlooked deduction can cover a range of insurance premium expenses to help offset your income tax costs as well.
Tip #9. Deduct Non-Capital Losses
Many small businesses in their first few years of existence end up paying more in expenses than they make in profit. If that is the case for your small business, consider how to best use that to your advantage. You can carry this credit three years back or seven years forward, so you may want to consider whether to carry it backwards to reclaim taxes already paid, to use it this year for income tax deductions, or to carry it forward for a future year to offset predicted larger incomes.
Tip #10. Claim Repair and Maintenance Costs
Typically, small businesses can deduct the full costs of materials and labor for repair and maintenance to your business property. Even if your small business operates out of your own home, you may be able to write off these expenses if they are business-related.
Income tax bills can frustrate small business owners trying to make, and keep, a profit, but by using these 10 simple tips and write offs, you can save money and keep your business profitable.