5 Small Business Tax Strategies to Reduce Income Tax in Canada

Did you know that donations of more than $200 to registered Canadian charities can earn you higher tax credits? Yup, charitable donations of $200 or more to registered entities attract higher tax credits. That’s just one of the many strategies small businesses in Canada can employ to reduce their income tax. Here are more.

5 Tax Strategies for Canadian Small Businesses to Lower Their Income Tax

1. Collect All Your Receipts

Small business expenses such as parking fees, food bills that you paid at a business meeting with a client, or even the daily coffee that you pick up on the way to work can be claimed as tax deductions. Reduce your income tax by collecting receipts for such petty expenses that you incur in your day-to-day business. You will be surprised how much such petty expenses can add up. Remember, though, credit card statements are not accepted as proof by CRA (Canada Revenue Agency). You should always file your receipts properly, just in case CRA asks for proof.

2. Maximize Non-Capital Losses

If your business expenses are more than your business income in any particular year, it is called a non-capital loss. There are two ways you can use non-capital losses to reduce your income tax. If you are a part-time freelancer with other sources of income, you can use your non-capital losses to reduce your total taxable income.

However, if you run a business full-time, you can still use non-capital losses to maximize tax deductions. Non-capital losses, for incorporated businesses in Canada, can be carried forward for up to 20 years, or carried back by up to 3 years. Thus, you can use your losses to reclaim taxes that you paid in previous years. An even better strategy is to carry your losses forward and use it in a year when you expect to make sizeable profits.

Keep in mind, though, claiming tax deductions against non-capital losses every year is bad strategy. The CRA expects your business to become profitable, eventually. If you continue to show losses and claim deductions, you might incur the wrath of the CRA.

3. Use Income Tax Credits from Charitable Donations

The more you donate to registered charities in Canada, the more tax credits you earn. You can claim charitable donations as deductions for up to 75% of your net income from business. However, donations to political parties, non-registered organizations, and American charities do not count. You can also carry forward unused tax credits from charitable donations for up to 5 years. Similar to non-capital losses, donations can be used to offset higher profits in subsequent years to lower your income tax.

4. Split Your Income

Like most other countries, Canada has income tax brackets. The more you earn, the higher your tax rate. You can lower your taxable income by splitting your income with a family member. For instance, if you are taking your college-going son’s help in answering calls at office, you can give him an annual salary of, let’s say, $12,000. You can show this salary as a business expense and lower your the tax rate. Since your son isn’t making substantial income of his own, he will, in all probability, not be paying any income tax, at all.

Keep in mind, though, you have to be reasonable while splitting your income this way. If you intend to claim thousands of dollars as deductions for salary paid to a family member, the said family member should be doing more than just interning at your firm.

5. Incorporate the Business

Incorporated businesses in Canada attract a tax rate of 10.5%. In addition, you get the benefit of deferred corporate taxes. If you are making sizeable profits already, it might be wise to incorporate your business, in order to enjoy corporate tax benefits. At NorthOne, we made the process of incorporation straightforward and hassle-free, so more small businesses can start enjoying the benefits of incorporating their entity. You can use our incorporation tool by clicking here. All you’ll be charged for is the government incorporation fees.

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