It’s exciting to see how many people in Canada come up with amazing business ideas and bring their vision to life. If you are one of those amazing people about to launch your first-ever startup business, there’s one thing you must know!
How to minimize your small business taxes in Canada?
When you launch a start-up and strategically plan your process, you ultimately scale your business and contribute significantly to the economy. Therefore, you must know how to utilize all the amazing tax benefits to minimize your taxes legally out there waiting for you.
Follow these tips if you are excited to legally minimize business taxes in Canada.
1. Choose The Right Business Structure:
When you are about to launch a start-up, you already have a business structure in mind. If not, this is your sign to think of one!
The right business structure is not an absolute one that works best for everyone. It depends upon the complexity and scope of your business. For every business structure, there are great business start-up tax deductions available that help ambitious business owners scale their businesses.
For instance, a partnership business gives you the flexibility of splitting the total tax returns between two or more members, unlike a sole proprietorship.
Is Incorporating My Business The Best Tax Strategy?
Corporations help you get the most tax advantage than any other business structure. A corporation is a separate legal entity, meaning business profits are taxed at a lower corporate tax rate instead of personal rates. The small business deduction (SBD) reduces the corporate tax rate to 9% federally, with additional provincial reductions.
Additionally, incorporating allows businesses to defer taxes. Instead of withdrawing all profits as personal income, business owners can leave money in the company, where it will be taxed at a lower rate.
2. Utilize The Small Business Deduction (SBD):
The SBD is a great tax relief provided by the Canadian government for incorporated businesses. It reduces the corporate tax rate on the first $500,000 of active business income, allowing incorporated businesses to benefit from a lower tax rate. If you want to qualify for the SBD, you must:
- Be a Canadian Controlled Private Corporation (CCPC)
- Generate active business income (passive income is not included here)
- Stay within the $500,000 threshold limit.
If you successfully pass the eligibility criteria for SBD, you can greatly minimize your small business taxes in Canada.
3. Claim Your Small Business Startup Tax Deductions:
Did you know that having a business is the ultimate key to minimizing your tax bill?
It’s a great surprise for a small business startup having to deal with CRA business tax filing for the first time. Yes, there are a lot of tax deductions available for business owners that you can claim directly from the CRA. some of the major deductions for small business taxes in Canada include:
- Traveling expenses (meetings, etc)
- Business meals
- Office equipment
- Marketing and advertisement costs
- Home office expenses (if you work from home)
You can get a detailed understanding of the 10 major tax deductions every small business owner should know here.
4. Implement Income Splitting Strategies:
A great way to minimize your small business taxes in Canada is to split your income strategically within your family/relatives. You can do this in different ways. Some of them include:
- You can hire a family member into your corporation, a spouse, or a child. If they work for the business, they can be paid a reasonable salary, reducing overall taxable income.
- Another way to minimize your small business taxes in Canada is to use dividends. If family members own shares in the corporation, dividends can be distributed to them at lower tax rates.
- You can also reduce your tax bill by setting up a family trust. It can hold shares in the company, distributing income among beneficiaries in lower tax brackets.
If you plan to utilize income-splitting strategies to reduce small business taxes in Canada, make sure to follow the Tax On Split Income (TOSI) rules properly. Otherwise, it will cause penalties.
5. Utilize Tax Credits And Government Incentives:
You know that the corporate tax rate in Canada is low. But did you know that you can make it much lower?
As a start-up business, the Canadian government offers several tax credits and incentives that potentially reduce your tax bill. You can claim those taxes and significantly minimize your small business taxes in Canada.
Some of the common tax credits and incentives include:
- Scientific Research & Experimental Development (SR&ED) tax credit.
- Investment Tax Credit (ITC).
- Apprenticeship Job Creation Tax Credit (AJC).
- Digital Adoption Program.
6. Hire A Professional Accountant:
You might wonder why hiring a professional accountant is stressful! Well, here’s the valid reasoning for it.
Professional accountants are well aware of the ongoing tax trends and updates. They stay informed and vigilant about any incentives to claim deadlines and great strategies to minimize small business taxes in Canada.
Professional tax accountants help you with the tax filing process with 100% compliance and maximum benefits. So next time you think about why a professional accountant, ask yourself what’s your ultimate goal. If it’s minimizing small business taxes in Canada, a professional accountant will help you out.
Final Thoughts
The tax scenario in Canada is stressful if you are experiencing it for the first time without any strong support. You can legally minimize your business taxes in Canada if you choose the right business structure, utilize deductions, and tax credits, and implement strategic planning.
A proactive approach, combined with expert financial advice, ensures that businesses remain compliant while maximizing their savings. By integrating these tax strategies, startups can reinvest in growth, innovation, and long-term success.
If you’re launching or growing a startup, consider consulting a tax professional to personalize these strategies to your business requirements. The key to minimizing taxes isn’t just knowing the rules, it’s applying them effectively!