7 Strategies to Reduce Income Tax for Small Businesses in Canada
Does the amount of income tax you paid last year make you shudder? This list of strategies may help reduce the amount of tax you pay next year.
1) Always collect receipts for business-related activities.
Remember to keep receipts for "little" things. The parking fee on the way to meet a client, the "few" letters you mailed, the bag of coffee you picked up for the office - all these little things can really add up over the course of a year. Maximize your income tax deductions by collecting the receipts for all your purchases that are or may be business-related, and recording and filing them appropriately.
2) Maximize your non-capital losses.
Similarly, if your business has a non-capital loss (defined as when your expenses exceed your income for the business) in any year, consider when you can best use this loss to decrease your income tax bill before you use it. Non-capital losses can be used to offset other personal income in any given tax year, can be carried back three years, or carried forward for up to seven years.
3) Maximize your charitable income tax credits.
Charitable donations to registered Canadian charities earn you tax credits. But are you aware that charitable donations that total over $200 provide you with more of a tax credit because they're assessed at a higher rate? To maximize your charitable income tax credits, consider giving more to the registered charities of your choice this year. If you make $30,000 in income and decided to give only 5% of your income, the fortunate charities would get $1500.
4) Maximize your Capital Cost Allowance (CCA)
Most Canadian small business owners know that instead of just deducting the cost of whatever depreciable property they've acquired to use in their business in a particular year, they need to deduct the cost of the depreciable property over a period of years, through a CCA claim.
5) Split your income.
The income splitting tax strategy lets you take full advantage of the marginal tax rate disparities. The higher your income, the higher your marginal tax rate. By transferring a portion of your income to a spouse or child, a person with a lower income, you can reduce the marginal tax rate on your income.
6) Take full advantage of the income tax deductions available to home-based businesses
Do you operate your business out of your home? If not, what's stopping you? While not every business is suitable for a home-based business, home-based businesses do have advantages when it comes to income tax.
7) Incorporate your business?
One reason many sole proprietors and partners incorporate their businesses is because of the tax advantages of incorporation. The best known is the Small Business Tax Deduction, whereby the income of qualifying Canadian-held corporations is taxed at a special "reduced" rate. For Canadian controlled corporations claiming the small business deduction, the net tax rate is 11%.
Start Reducing Your Income Tax Today
If you think your small business is paying too much in taxes then we can help. A free no obligation conversation is well worth your time to see if there are any opportunities you may be missing when it comes to taxes.
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