Small Business Tips Blog
They say the only certainties in life are death and taxes. And while death is usually pretty cut and dry, there seems to be a fair amount of uncertainty when it comes to taxes…especially if you own a small business.
With tax-time right around the corner, now is the time to clear up some of those tax uncertainties and, hopefully, find ways that can help you save some of your hard-earned dollars. While it can feel like there are about as many tax rules as there are pick-up trucks on the road, here are a few tips that may help you save a few more dollars come tax time.
Deduct, deduct, deduct! Income tax rates for those who are self-employed are the same as personal tax rates for employed workers. But if you’re a sole proprietor or a partner in business (but not incorporated) you can take advantage of a number of deductions that an average employee cannot. These include:
Home office expenses: If your home serves as your office, calculate the percentage of your house your office occupies. Use that number to determine the percentage of home office expenses you can claim, which may include:
o Rent or mortgage
o Property taxes
o Home insurance
Office supplies: If items like stamps and other supplies are used solely for business, they’re 100 per cent deductible.
Entertainment for business purposes: You can claim expenses such as lunch or tickets to the hockey game if they’re used for business, like meeting with a client. The maximum amount you can claim is 50 per cent. If your expense is a combination of business and personal, you can claim only the costs related to business.
Capital property: If you’ve purchased assets to use for your business -- like vehicles, furniture or equipment -- you can write those costs off over time. You can’t claim the full amount of a purchase in the tax year it occurs, but you can claim a percentage of that cost each year over the expected life of the item. This is called a capital cost allowance (CCA). The Canada Revenue Agency has a list of CCA classes that shows the annual depreciation amount and the rates for different types of capital property.
Take dividends instead of salary. Instead of paying yourself a salary, which is 100 per cent taxable, you can take part of your pay in dividends instead and enjoy a lower tax rate. In fact, depending on where you live, you can earn $30,000 to $40,000 in dividend income before you start paying tax. And if you don’t have a big need for cash, you can even take all of your salary in dividends. Of course, it’s best to get professional advice because dividends aren’t the solution for everyone. But here are some pros and cons:
Dividends are taxed at a lower rate than salary; that means you pay less personal tax.
You don’t pay into the Canada Pension Plan, saving even more money. (Although not paying CPP will reduce the amount of CPP you’re entitled to when you retire.)
If you receive dividends instead of salary, you can lose other possible personal income tax deductions, like child care expense deductions.
You won’t be able to contribute to an RRSP because you don’t have any income.
Contribute to an RRSP. Investing in a Registered Retirement Savings Plan is one of the best tax deductions for small businesses. If your business is providing you with a solid and steady income, RRSPs can provide you a significant deduction at tax time and savings for your retirement. Here are some good reasons to contribute:
The money you put into your RRSP will not be taxed as income until you take it out, and neither will the interest your RRSP investments make.
An RRSP reduces your taxable income. Your RRSP contribution is deducted directly from your income. If that deduction drops you to a lower tax bracket, you can enjoy considerable tax savings.
If your business has a "down" year, you can wait and make a larger contribution to your RRSP in another year when your income is higher, thus allowing you more control over how much income tax you pay. Visit the CRA website to find out how much contribution room you can carry forward.
Some of these tips won’t apply to your 2016 taxes (it’s too late to contribute any more towards RRSPs, for example), but with smart moves over the next year and further research into other deductions you can take advantage of, the next dreaded tax season may not be as dreadful after all!