Pay Lower Business Tax by Following These 5 Smart Tips

When it comes to business, taxes are a way of life. You have to make regular payments to the Canada Revenue Agency (CRA), or your business will cease to exist. However, that does not mean you have to pay your taxes blindly. There are steps that you can take to minimize your company’s tax burden.

1. Set Up a Home Office

If you are like most small business owners, you probably do a fair bit of business from your home. “Things like utilities, Internet charges, and stamps are often missed by business owners who run a home-based business or use a home office,” explains Scotiabank. “The CRA requires you to calculate the percentage of your home space allocated for business use to determine the portion you can claim for rent, mortgage interest, utilities and other expenses.” If you set aside a particular area of your house for your company’s use, you could get some significant deductions.

2. Retirement Contribution

Saving for the future is never a bad idea, but it could also be your best bet for paying less business tax. The Balance calls Canada’s Registered Retirement Savings Plan (RRSP) “The Best Income Tax Deduction for Small Businesses” – and with good reason. “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,” writes The Balance.  “It doesn’t make tax sense for you to make a large RRSP contribution in a low-income year.” 

3. Hire your Spouse

One of the most aggressive things you can do to pay less business tax in Canada is to hire your spouse or child. This way, his or her income still goes into your family account, and the first several thousand (up to the basic personal amount) is tax-free. For 2017, that means that the first $11,635 you pay your spouse is not subject to taxation. Plus, the salary you pay your spouse can be a tax deduction for your business – as long as the amounts are reasonable and the work documented.

4. Capital Cost Allowance

As a small business in Canada, you have the right to deduct the depreciation on any assets you acquire in a given year. However, you can also claim the Capital Cost Allowance (CCA). This works like depreciation, but there are a few substantial differences. “You do not have to claim the maximum amount of CCA in any given year. You can claim any amount you like, from zero to the maximum allowed for the year,” says Canada Revenue Agency. “For example, if you do not have to pay income tax for the year, you may not want to claim CCA. Claiming CCA reduces the balance of the class by the amount of CCA claimed. As a result, the CCA available for future years will be reduced.”

5. Incorporate

Small businesses in Canada receive an exclusive small business tax deduction. While you will need to pay for the costs of incorporation and keep money reserved in a corporate account, if you can meet the bar, the tax savings can be significant. Most corporations pay a net tax rate of 15 percent, but Canadian-controlled private corporations who are eligible for the small business deduction pay just 11 percent net tax.

Do you have a small business and some tax questions? Contact KAFT CPA. We can help you develop strategies to pay less business tax.