If you’re a business owner in Canada, you are likely all too familiar with company taxes. It’s a vital a part of doing commercial enterprise, but that does not suggest it’s any much less complex or tough to navigate. The key to saving on company taxes lies in understanding the tax, from federal and provincial charges to deductions and credit. This article aims to empower you with that knowledge and provide you with practical strategies to lower your tax obligations.
Corporate tax is a levy placed on the profit of a firm. It’s supposed to proportion a part of the organization’s earnings with the government, which uses those funds to aid the financial system. In Canada, each federal and provincial governments impose corporate taxes, although the rates and rules vary.
Paying yourself in dividends, as a shareholder of your corporation, comes with several benefits. Firstly, dividends are subject to a lower income tax rate than salary since they’re considered investment income. Consulting an accountant about this process is advisable due to its complexities.
Additionally, you can receive the first $40,000 of dividends tax-free. Unlike salaries, dividends aren’t subject to withholdings or remittance requirements. They also aren’t subject to Canada Pension Plan premiums, potentially saving you up to $4,000.
However, choosing to draw a salary offers its advantages. It qualifies as earned earnings, permitting you to growth your contributions to the Registered Retirement Savings Plan (RRSP) and your entitlement to the Canada Pension Plan (CPP). So, if you’re eager on saving for retirement and preference CPP payments, opting for a revenue may be extra useful.
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.
The spousal loan strategy is an income-splitting technique that could help couples reduce their overall tax liability. This strategy becomes beneficial when one spouse falls into a lower tax bracket.
In this approach, the better-incomes partner lends cash to the decrease-incomes partner on the Canada Revenue Agency’s (CRA) prescribed hobby fee on the time of the mortgage. The borrowed money is then invested by means of the lower-earning partner to generate investment earnings, which incorporates hobby, dividends, and capital gains.
The income and capital profits made out of those investments aren’t attributed returned to the better-earning spouse. As a result, the general family tax is minimized.
It’s crucial to maintain proper documentation of the loan, charge interest at a rate equal to or more than CRA’s prescribed rate, and the interest on the loan should be paid annually or within 30 days of the year-end by the lower-earning spouse.
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.
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 12.2%.
The home purchase strategy is an effective way to leverage funds from your corporation tax-free to buy a home. Suppose you have $100,000 in your corporation, and you wish to purchase a residence. As an employee of your corporation, you can borrow this sum as a down payment for your house.
You must repay this loan to your corporation over a reasonable timeframe and pay interest on it. However, as you’re effectively paying interest to yourself, it doesn’t constitute an additional cost. This strategy provides a unique advantage of utilizing your corporate funds for personal benefit while maintaining tax efficiency.
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 2023 for up to $0.68 for the first 5,000 kilometers that you drove for business purposes and $0.62 per km thereafter with no limit on the number of kilometers driven.
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.
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 that you can implement to decrease your income tax bill —small business tax strategies that you can start applying today. Be in contact with an accounting firm so you don’t have to pay an extra price or get depressed because of unusual tasks.
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.