Ask an advisor: small business owner tax tips

Ask an advisor: small business owner tax tips

< Back to Articles | Topics: Trends | Contributors: Shauna Selig | This is a guest post from IG Wealth Management
(Member since 2016) | Published: September 6, 2023

This is a guest post from IG Wealth Management
(Member since 2016)

There are considerable advantages to being the owner of one of Canada’s 1.22 million small and medium-sized businesses. You get to be your own boss, you choose your own hours, and you get to work on something you’re passionate about. Additionally, business owners have numerous ways to save on taxes.

Typically, though, entrepreneurs are too busy with the day-to-day running of their business and planning for the future to focus on tax strategies for business owners. Below are a number of tax-saving tips for small businesses that could save you a tidy sum every year-end. 

Employ your spouse and children

Whether you operate your business personally or through a corporation, you should consider paying a salary to your spouse and children. Canada’s progressive tax system, which assesses higher income earners at higher tax rates, provides an incentive to split income with family members in a lower tax bracket.

Incorporate your business 

One of the most effective tax-saving tips for small businesses — if your business produces more profit than you need to live on — is incorporation, which could produce a sizeable tax deferral by qualifying for the lower small business tax rate for active income. This deferral benefit, however, is only available if the profits are left in the company.

The tax deferral achieved through incorporation can create a permanent tax saving if the shares of the business are eventually sold and are eligible for the lifetime capital gains exemption. 

Maximize tax breaks from RRSPs 

In order to make the maximum allowable registered retirement savings plan (RRSP) contribution next year, you’ll need to create the contribution room this year by maximizing reported earned income. If incorporated, you will want to review the best dividend/salary mix for your situation.

You may also want to make a contribution to your tax-free savings account (TFSA). It’s important to achieve a balance in your personal investment plan to ensure that it fits in with this year’s maximum contribution limits for business owners.

Prepare for the sale of your business

It’s never too early to plan your business exit strategy. If you’re planning on selling all or part of your business at some point, confirm with your accountant whether you’re eligible for the lifetime capital gains exemption and, if so, what steps are required.

R and D expenses 

When looking at how to how to save on income tax expense in your business, it’s important to know that research and development expenses can bring a considerable tax break. Any cash invested in new products and production processes may qualify for valuable tax incentives in the form of refundable and non-refundable tax credits. 

Home office deductions

If you have a small business and work from out of your home, you can claim a portion of your household expenses. 

Invest excess cash

Since personal tax deferral is accomplished by leaving profits in the company, the question to ask yourself is: what do you want to do with those profits? If paying down debt or reinvesting in the business operations are not options, then a smart investment plan is your best alternative.

A financial advisor can help with small business tax planning and come up with strategies to reduce your business taxes. They can also suggest strategies that will help improve the day-to-day running of your business, grow your business, and maximize your profits. Additionally, they can help you ensure your business and personal financial plans are synchronized and optimized. 

< Back to Articles | Topics: Trends

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