Tax is a part of our lives and a part of doing business. While you can’t actually avoid income tax, there are a number of tax strategies that you can implement to legally reduce your income tax burden if you operate a small business as a sole proprietorship or a partnership. In these scenarios, the results of the business operations are taxed on the individuals’ personal tax returns at their personal margin tax rates. Look over the list of items to consider that may have tax advantages for you:
1) Collect all receipts for business-related endeavors: I am often surprised when businesses don’t obtain or keep receipts for small items, such as parking fees for a client meeting, letters mailed, and supplies. These items all add up during the year. These are all deductions that can be utilized to reduce taxable income.
2) Don’t forget your RRSP contribution: The Registered Retirement Savings Plan (RRSP) is hugely important for individuals. Contributions to an RRSP are deductible to reduce taxable income and accordingly the associated tax bill while also allowing you to save for your future retirement. For more information, you can read a previous blog on this topic: Don’t Forget your RRSP Deductions at Tax Time
3) Capitalize on charitable income tax credits: Charitable donations to registered charities or other qualified organizations will earn you tax credits. However, you should be aware that charitable donations over $200 provide you with a higher tax credit amount.
4) Take full advantage of your non-capital losses: If your business has a non-capital loss (i.e., expenses exceed income) in any year, consider the best time for you to use the losses to decrease your income tax. You can use non-capital losses to offset other personal income in a given tax year or the losses can be carried back as much as three years to get a refund of prior years’ taxes, or carried forward to offset future taxes.
5) Maximize income tax deductions available to home-based businesses: While not every business is suitable for a home-based business, if you do operate from your home, you can deduct a portion of many home-related expenses, such as utilities, maintenance within the home office area, home insurance, property taxes and mortgage interest. The amount that you can write-off relates to the percentage area of the home used for the business.
6) Vehicle: Many business owners are required to use their vehicle for business purposes. As a result, you can write off a portion of the vehicle cost or lease expense along with the associated operating costs such as gas, maintenance, insurance, etc. It is important to track your overall mileage using a log to record total kilometers driven in the year end to track your business trips including purpose of the trip and kilometers driven. This will allow you to determine and support the percentage use of the vehicle for business purposes for the year and determine the proper amounts for deduction. On a related note, always keep the actual gas receipts issued from the machine when filling up your vehicle. Credit cards statements for gas purposes are not considered adequate support.
7) Consider incorporating your business: One reason many sole proprietors and partners incorporate their businesses is due to the tax advantages of incorporation. The best known is the Small Business Tax Deduction, whereby the income of qualifying Canadian-held corporations is taxed at a special “reduced” rate. If your business has grown to a size where the net income generated exceeds your personal needs, you could incorporate the business and retain profit in the corporation to be taxed at the lower rate thereby providing a tax deferral until you eventually take the funds out of the corporation.