There are so many legitimate ways that you can use to save your company’s taxes. Canadian corporations have two ways to minimize the amount of income tax they have to pay; do prescribed things that earn them tax credits or take advantage of income tax deductions.
This guide offers some of the top strategies to minimize your tax burden and maximize your business income.
When you pay yourself in dividends, you get paid as a shareholder (or an owner) of the corporation. Unlike a salary, which counts as personal income, dividends are considered investment income. Dividends attract a much lower rate of income tax than salary does since they are subject to the corporate tax rate.
Another advantage of dividends is that the first $40,000 of dividends can be received on a tax-free basis. Just take cash out of your company, call it a dividend, and there is no requirement for the company to withhold or remit tax on these payments.
Also, dividends are not subject to Canada Pension Plan premiums. CPP premiums are 9.9% of the drawings that you take up to a maximum of $4,000. Not having to pay into the Canadian Pension Plan can save you money.
However, there are some advantages with salary. First, salary, unlike dividends, qualifies for earned income purposes, which means that the higher salary you take, the more room you have for your Registered Retirement Savings Plan (RRSP) increases and you also increase your entitlement to the Canada Pension Plan (CPP). If you’re an avid saver and would like to contribute to your RRSP and wish to receive Canadian pension payments upon retirement, then salary is the way to go for you.
The shareholder loan is a useful tool for tax planning and cash management between the owner and the company. If used correctly, the timing of cash draws, dividends, or salary can be used to your advantage.
What’s a shareholder loan? A shareholder loan is financing provided to a company by its shareholders and represents debt for the business. A shareholder loan could be expenses that you have paid on your corporation’s behalf and therefore your corporation now owes you. It could also be money that you’ve let your corporation for startup expenses or operating expenses. As said shareholder loans can be paid on a completely tax-free basis. So, let’s say you have $30,000 in shareholder loans owing to you by your corporation. It would make sense therefore to pay yourself the $30,000 first before you start drawing income from salary or dividends both of which are taxable.
The spousal loan strategy is a method of income-splitting that may enable couples to lower their overall family tax bill by entering a prescribed rate loan arrangement. If your spouse is in a lower income tax bracket than yourself it’s a good idea to lend your spouse some money. This strategy involves you loaning funds to your spouse at the Canada Revenue Agency’s (CRA) prescribed interest rate in effect at the time the loan is made. Your spouse will then invest the loaned funds to generate investment income, including interest, dividends, and capital gains. Your spouse’s income and capital gains on the investments that were again sourced from the loans would not be attributed back to you as the higher income earner. Therefore, as a family, you end up saving overall family tax. Make sure the loan is properly documented. Charge interest that’s at least equal to the Canada Revenue Agency’s prescribed rate and ensure that the spouse who receives the loan pays the interest that is due on the loan every year or within 30 days of the loan end of the year.
Like the spousal loan idea, you could give your child a gift. Canada has no gift tax, so you can give your children as much money as you like, it is not taxable as income or deductible as an expense. The advantage of doing so can bring great joy on both sides of the parent-child fence, particularly when parents are still living to see the financial relief their gift brings. Also, capital gains earned by their child on investments are not attributed back to you as the parent. So, let’s say you buy a piece of real estate for $200,000 and gift it to your child. Over seven years that appreciates to $300,000 the capital gain of 100,000 would be taxed in your child’s hands but not yours thereby saving your family in taxes overall.
This is one of the most important tax tips so please pay particular attention to this. Corporations have a very low tax rate for small business corporations in Canada. We, as Canadians, have among the lowest corporate income tax rates among the G8 nations. A small business corporation in the province of Ontario is taxed at a combined federal-provincial rate of only 16.5%. Now compare that to an individual at the highest marginal tax bracket is taxed at 46.4%, that’s a very high tax rate. So, therefore, you could save approximately 30% by incorporating. A key tax benefit of a corporation is the ability to retain unneeded income and can take advantage of tax deferral meaning that you’re leaving it in the corporation to be subject to that low corporate tax rate of only 16.5%. In general, corporate tax rates are lower than personal tax rates, but your company has to generate a substantial profit before this becomes an advantage.
This is an excellent tax-saving strategy. This strategy allows you to take money from your corporation, without paying any tax, to purchase a home. Let’s say you have $100,000 in your corporation and you want to purchase a home. You are an employee under a corporation in the books, so you receive T4 at the end of the year and receive a salary. You can take that $100,000 tax-free from your corporation and use that as a down payment on your home, the home that you’re going to live in of course. You have to repay the loan that you’ve taken from your corporation over a reasonable period of time, and you must also pay your corporation interest but then again, you’re paying interest to yourself, so it really doesn’t matter in terms of cost.
It is not really what it sounds like but it’s an income-splitting strategy. For example, let’s suppose that you and your spouse are both shareholders of your corporation you could pay dividends to yourself and your spouse let’s say $50,000 each, and conceptually receive $100,000 in dividends without paying a cent of tax. That’s much better than paying yourself $100,000 in dividends only to you and having to pay tax. So, you can see that by paying dividends to one or more family members you can reduce the overall tax rate paid by the family.
Canada Revenue Agency (CRA) has no problems with you paying family members as a tax-saving strategy so long as you meet two key conditions: You must be able to show that your family members did the work. The wages must be “reasonable in the circumstances”. Your spouse will be happy because he or she is getting some income and you are also happy because the salary paid to your spouse or family members is tax-deductible to the corporation and if your spouse or family members are in our low tax bracket, very little tax is paid by them. You have to pay a reasonable salary to your spouse or family members so you couldn’t for example pay $70.00 an hour to your son for cleaning your office or filing, which will be challenged by the CRA.
This payment is in addition to the salary and wages. Let’s say you own your own vehicle in your name, and you use that for business purposes you can pay yourself a tax-free automobile allowance in the year 2021 for up to $0.59 for the first 5000 kilometers that you drove for business purposes and $0.53 per km thereafter with no limit on the number of kilometers driven. So, if you drove let’s say 20,000 kilometers in the course of the year for the business you could have your corporation write you a cheque for $10,900 (5000*.59 + 15,000*.53) and not pay a dime of tax.
This is often overlooked but is a valuable deduction. If you borrow money to invest in your business and pay interest, the interest that you paid is tax-deductible. Also, let’s say you borrow money from the bank or credit card or some other source and have to pay interest on that money, but a good tax strategy is to intern charged interest to your corporation that interest paid by the corporation to you will be tax deductible for the corporation. The interest income received by you from the corporation would be offset by the interest that you have to pay to the third-party bank or credit card company resulting in zero income tax except at a personal level for yourself.
Start Reducing Your Corporate Tax Today!
These are just some of the available tax deductions and strategies to increase your take-home amount. While not all of these strategies will work for every small business, hopefully this list has gotten you thinking about tax planning. Let us help you explore more strategies you can implement to decrease your income tax bill —small business tax strategies that you can start applying today.
Feel free to contact us through our website filingtaxes.ca or reach out at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
There are steps you can take to reduce your business's tax liability. From business expenses to careful investments, there are a variety of strategies that smart business owners can use to reduce the portion of their business income that can be taxed. Understanding what deductions you can make, what equipment to purchase, and how to invest in operations can help reduce your tax liability. One of the best ways to decrease your tax exposure is to pay attention to tax credits as well as tax deductions.
YES, you can prepare your corporate tax return, and file it with the CRA. However, if you’re still not confident you can file a return yourself accurately, my only advice to you would be to hire an accountant to do it for you. Unlike the personal tax return, which is relatively simple and can be prepared by somebody without an accounting degree, corporate taxes are much more complex. If you try to file your own taxes, even though you have no experience, this might result in many costly mistakes which you can avoid. But if you still want to do it yourself, at least purchase software that can do some basic checks for mistakes.
According to Canada Revenue Agency (CRA) except crown corporations and resident charities, ALL resident corporations, non-profit organizations, tax-exempt corporations, and inactive corporations, have to file a tax return EACH year even if there is no tax payable! It is a criminal offense not to file.
A non-resident corporation has to file a T2 return if, at any time in the year, it carried on business in Canada, it had a taxable capital gain, or, in some cases, it disposed of taxable Canadian property.
The basic rule for filing your Canadian corporate tax return is that you must file your return no later than six months after the end of each tax year. So, when your T2 tax return is due depends on your corporation's fiscal year-end. If, for instance, your corporation has a fiscal year-end of June 30th, your Canadian corporate tax return would be due on December 31st (the last day of the sixth month).
All corporations — including non-profit organizations, tax-exempt corporations, and inactive corporations — have to file a T2 return for every tax year, even if there is no tax payable.
The Income Tax Act imposes penalties on Canadian business owners who do not file a tax return, make false statements, or underreport their income. The deadlines for filing corporate income tax vary depending on the corporation’s fiscal year-end and what kind of corporation it is, but it’s very important to get your corporation’s T2 return filed on time because if you don’t, there are penalties. The standard penalty for filing your T2 tax return late is 5% of the unpaid tax that is due on the filing deadline, plus 1% of this unpaid tax for each complete month that the return is late, up to a maximum of 12 months.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.