8 Tax Tips for Canadian small business tax savings

By Glen Johnson, Advisor.CA

Small business owners are allotted a variety of methods to improve their tax situation. However, it can be hard to learn about Canadian small business tax savings. As a result, Olympia has compiled a list of some of the most commonly used or frequently applicable tax tips. There’s still time to make use of our tips. Start the New Year with more money than you had expected! It’s also important to plan for the small business tax proposed earlier this year.

1. Balance your Dividend/Salary Mix 

As a small business owner, you are entitled to withdrawing cash from your corporation as either a dividend or salary. Both have their perks and downfalls. Ultimately, it is up the owner to determine what mix will maximize their earnings (based on each owner’s unique circumstances). For example, you may want to pay yourself with enough salary to max out your RRSP. On the other hand, you may want to take out part of your pay as a dividend, to take advantage of a lower tax rate. Not only is your mix determined by current circumstances, but also future predictions. If you expect an economic downturn in the next year, it may not be wise to pay out a large salary.

2. Know your eligible expenses

Money spent on your work as a small business owner can be claimed as a tax deduction under reasonable circumstance. If you own a car, keep track of mileage used. However, don’t expense the cost of a gas refill every time. Think back to reasonable circumstances. If you are an independent contractor, some popular eligible business deductibles are material and supplies (including equipment), rent, travel, and continuing education. Reasonable is subjective. You’d be surprised to hear that kitchen equipment (used to test new recipes) could be considered a legitimate business expense for a cookbook author.

3. Keep track of your money

As a small business owner, tax prep begins the moment you make income through the business. If you are audited by CRA, it is crucial to have a receipt present. They should be kept for at least 7 years. Although you might still win a case without a receipt, you would have to go to many unnecessary lengths. Some small business owners even leave notes on the back of their receipts to serve as reminders.

4. Consider paying income taxes every month

If you have trouble budgeting or simply don’t like the idea of one massive payment at the end of each year, consider paying income taxes monthly. In order to do this, you can inquire with the CRA. It is possible to set them up as an online vendor.

5. Consider a Health Spending Account (HSA)

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Every year, small business owners turn to traditional health insurance because it is so widely marketed. However, you only want to insure low-probability, highly catastrophic events like your property burning down. Insurance is not effective for planned or administrative events such as a dental appointment. That’s where an HSA comes in. It has no premiums and covers almost all eligible health-related expenses. Therefore, it works especially well for small business owners.  Think of it as a tax plan which turns personal medical expenses into business deductibles. Here is our top 19 FAQ for HSA, please give it a read to learn more.

6. Paying salary to your family (Income Splitting)

The key is reasonable conduct. Any salary paid out will count as a business deduction. However, the salary must reasonably match the services provided. Something such as a $500,000 salary for simple administrative services may be unreasonable to many. You should treat family member salary as if they were an “arms-length” employee. Make sure to re-assess your family business’ organizational structure, especially when the new small business tax proposals come into effect.

7. Apprenticeship Job Creation Tax Credit

If your business hires tradespeople, consider applying for the apprenticeship job creation tax credit. It has a value of up to $2000, applicable only to new recruits within the first 2 years of their apprenticeship program.

8. Create a separate company for tax-deferred investing

Outside of registered retirement plans, you normally invest with after-tax dollars. Instead, you can move funds out of your business to a related holding company. In this way, you trigger no tax payments. You can then invest the CRA’s cash as you would your own personal funds. You will pay the tax eventually, but until then, you will have a bigger pool of capital to invest.

These are just some of the available tax deductions and strategies to increase your take-home amount. With thousands of options available to business owners, it may be in your best interest to research and explore.