Does the amount of income tax you paid last year make you shudder? You can't avoid income tax, but there are tax strategies that you may be able to use to reduce the amount of income tax you pay if you operate a small business in Canada.
Read through this list of small business tax strategies and see how many you're currently applying to reduce your income tax bill - and which ones you can start applying right now to reduce the amount of income tax you're going to owe this year. (Note that some of these small business tax strategies only apply to people who are running sole proprietorships or partnerships, who file their income tax using a T1 form.)
1) Always collect receipts for business-related activities.
I'm amazed by how some business people don't bother to get or keep receipts for "little" things. The parking fee on the way to meet a client, the "few" letters you mailed, the bag of coffee you picked up for the office - all these little things can really add up over the course of a year.
Maximize your income tax deductions by collecting the receipts for all your purchases that are or may be business-related, and recording and filing them appropriately. (See Maximize Your Business Income Tax Deductions for more information on handling receipts and specific business expenses.)
2) Manage your RRSP contribution.
The Registered Retirement Savings Plan (RRSP) is The Best Income Tax Deduction for Small Businesses. But that doesn't mean that you should necessarily just make the maximium RRSP contribution every year. Managing your RRSP contribution is a much better small business tax strategy.
Your allowable RRSP contribution will carry forward if you don't use all of it in a particular year, so estimate what your total income for the year will be and then decide how much of an RRSP contribution you should make that particular tax year, if any, to maximize your RRSP's tax bang for the buck. It doesn't make tax sense for you to make a large RRSP contribution in a low income year.
3) Maximize your non-capital losses.
Similarly, if your business has a non-capital loss (defined as when your expenses exceed your income for the business) in any year, consider when you can best use this loss to decrease your income tax bill before you use it. Non-capital losses can be used to offset other personal income in any given tax year, can be carried back three years, or carried forward for up to seven years. It may make more sense for you to carry your non-capital loss back to recover income tax you've already paid, or to carry it forward to offset a larger tax bill in the future than it does to use it in the tax year the capital loss occurred.
4) Maximize your charitable income tax credits.
Charitable donations to registered Canadian charities or other qualifed donees earn you tax credits. But are you aware that charitable donations that total over $200 provide you with more of a tax credit because they're assessed at a higher rate? To maximize your charitable income tax credits, consider giving more to the registered charities of your choice this year. If you make $30,000 in income and decided to give only 5% of your income, the fortunate charities would get $1500. (Be aware that non-registered Canadian charities, American charities, and political parties don't count.)
There are more small business tax strategies to help you maximize your business income tax deduction and reduce your income tax on the next page, including income splitting and tax strategies for maximizing your Capital Cost Allowance. Click to continue reading...