For small businesses, every single deduction counts. For new businesses especially, some tricks of the tax trade can be easily overlooked.
Manning Elliott LLP senior tax manager and chartered professional accountant Simran Bhatti says that when it comes to preparing for the tax season, businesses need to meticulously track their work-related expenses and consider these five tax strategies to save big.
1. Take a mix of salary and dividends
There are usually two ways of taking money out of a company – someone either takes a salary from the business or takes dividends, a sum of profit money paid regularly by the company to its shareholders. Both ways have their pros and cons. The tax rate paid by individuals on dividends is usually better than the tax rate on salary; however, dividends don’t provide a deduction within the company.
As each owner’s situation will be different year to year, Bhatti suggests reviewing your personal circumstances each year to determine what mix of salary and dividends is most advantageous.
“For example, if you take a salary, you have the ability to contribute to your RRSPs as salary creates RRSP room, unlike dividends. Contributing to your RRSPs, in turn, helps you reduce taxes personally,” said Bhatti.
2. Claim all eligible expenses in your business
Small businesses should avoid poor record keeping, making sure to keep receipts and track deduction-eligible expenses, according to Bhatti. Keep track of any eligible company expenses, whether it’s a vehicle, office supplies, rent, courses or training to upgrade your knowledge, or wining and dining a potential customer.
“The key here is making sure that the expenses are all business-related. Only use related to business activity is deductible,” said Bhatti.
For example, Bhatti suggests small businesses keep a log of mileage driven for business purposes, making sure to differentiate company car use from personal use. All deductible expenses are subject to a reasonable test, and any expenses related to meals and entertainment are only 50% deductible.
3. Claiming a capital cost allowance
Capital property is anything purchased for your business that you can get use out of over multiple years.
Qualifiers include such things as cars, computers, cellphones or any other equipment used within the business.
If small-business owners purchase a vehicle they plan to use for five years for company-related matters, they cannot deduct the full amount in the first year. Instead, they can deduct a capital cost allowance (CCA), according to Bhatti.
“The good thing about this is you don’t necessarily have to claim the expense each year. It’s a discretionary deduction. You may not want to take the expense in years where you don’t have any income. And in other years you may want to maximize the CCA amount you can take,” said Bhatti.
However, any sort of manufacturing and processing machinery and equipment a small business purchases after November 2018 can be entered for an immediate 100% deduction, according to the Canada Revenue Agency.
4. Pay family helping the business a salary
Many small-business owners get help from family members when starting a company.
“Whether someone’s spouse is taking care of their accounting for them or some administrative duties in their business, the owner has the ability to pay them a salary to create a deduction within the company to ultimately reduce the company’s taxes,” said Bhatti.
The salary should be reasonable based on the work being performed and be equivalent to what would have been paid to an arm’s-length employee for the same work.
5. Apply for various government incentive credits
There are many government incentives and credits out there that small-business owners can apply for.
For example, if a business pays salary to an eligible apprentice, it can apply for the apprenticeship job creation tax credit.
This provides a credit from the government, helping the business reduce its taxes on its tax return. Any unused credit can be carried back three years and carried forward for 20 years by the business. There’s also the scientific research and experimental development credit for businesses that are conducting research and development activities in Canada.
“These are optional credits available through the government that a lot of people don’t know about and could take advantage of,” said Bhatti, who suggests small businesses hire tax professionals to guide them through the application process.