What other small business tax strategies can you put into effect to reduce the amount of income tax you pay? Try one or more of these.
5) Maximize your Capital Cost Allowance (CCA) income tax claim.
Most Canadian small business owners know that instead of just deducting the cost of whatever depreciable property they've acquired to use in their business in a particular year, they need to deduct the cost of the depreciable property over a period of years, through a Capital Cost Allowance claim.
But many small business owners are not aware that they don't have to claim Capital Cost Allowance in the year that it occurs - a tax strategy that you can use to reduce your income tax. The CCA is not a mandatory tax deduction so you can use as much or as little of your CCA claim in a particular tax year as you wish; you can carry any unused portion forward to help offset a larger income tax bill in the future. It doesn't make sense for you to take your full Capital Cost Allowance claim deduction in a year that you have little or no taxable income.
Another aspect of mazimizing your Capital Cost Allowance claim is to buy (and sell) your assets at the right time. You want to buy new assets before the end of your fiscal year and sell old assets after the current fiscal year.
Be aware, too, of the 50% rule; in the year that you acquire an asset, you usually can only claim 50% of the Capital Cost Allowance that you would normally be able to claim (and in some cases, the "available for use" rule means that you can't claim Capital Cost Allowance until the second tax year after you acquired an asset).
6) Split your income.
The income splitting tax strategy lets you take full advantage of the marginal tax rate disparities. The higher your income, the higher your marginal tax rate. By transferring a portion of your income to a spouse or child, a person with a lower income, you can reduce the marginal tax rate on your income.
This is an especially powerful tax strategy for small business owners with children of post-secondary school age. Suppose that you employed your 19-year-old daughter in your business, paying her a salary totalling $10,000. Because of the basic personal income tax exemption, she would pay very little income tax, and would have a nice nest-egg to help pay for her education. (If you paid her an income equalling the personal income tax exemption, she would pay no tax at all!) And meanwhile, you've "lopped" $10,000 off your income for the year, decreasing the amount of income tax you personally owe. See Decrease Your Income Tax Bite With Income Splitting to learn more about this tax strategy.
7) Take full advantage of the income tax deductions available to home-based businesses.
Do you operate your business out of your home? If not, what's stopping you? While not every business is suitable for a home-based business, home-based businesses do have advantages when it comes to income tax. Besides the Business Use-Of-Home Deduction, home-based business owners can deduct a portion of many home-related expenses, such as heat, electricity, home maintenance, cleaning materials and home insurance. If you own your home, you can also deduct portions of your property tax and mortgage interest. Home Business Tax Deductions will give you more information about these potential income tax deductions.
8) Incorporate your business?
One reason many sole proprietors and partners incorporate their businesses is because of the tax advantages of incorporation. The best known of these tax advantages is the Small Business Tax Deduction, whereby the income of qualifying Canadian-held corporations is taxed at a special "reduced" rate. For Canadian-controlled private corporations claiming the the small business deduction, the corporate net tax rate is 11% as of January 1, 2008. For other types of corporations, the corporate net tax rate is 19.5% as of January 1, 2008.
However, incorporating your business as a tax strategy will only be effective if your business has grown enough for incorporation to be worthwhile. You not only have to have a significant income already to offset the costs of incorporation, but need to be prepared to leave enough of your business earnings in the corporation to benefit from corporate tax deferral.
For instance, if you operate an incorporated business and the corporation's profits in a given year are $60,000, but you take $60,000 from the corporation in salary, your $60,000 is then taxed just as your personal (T1) income would be now, making incorporation for this reason pointless. Should You Incorporate Your Small Business? gives more information about the general advantages and disadvantages of incorporation.
Start Reducing Your Income Tax Today
While not all of these tax strategies will work for every small business, hopefully this list has gotten you thinking about tax planning. The amount of income tax you pay is not an absolute written in stone. There are legal, sometimes simple things you can do to decrease your income tax bill - small business tax strategies that you can start applying today.