Tax planning is not a particularly enjoyable subject. But it is something you cannot afford to ignore, especially if you own a business.
Understanding how you may save on business tax and planning all of your taxes ahead of time can significantly lower your annual tax burden.
Continue reading to learn more about tax planning for corporations and how it can benefit you.
Understand the tax implications of the government’s Covid-19 relief programs
The federal government established a number of relief programs to assist people, businesses, charities, and non-profits affected by the Covid-19 outbreak. While several of these programs are no longer in operation, any subsidies obtained through the following schemes are taxable:
- Tourism and Hospitality Recovery Program
- Canada Recovery Program
- Hardest-Hit Recovery Program
These subsidies must be recorded on your income tax return for the year in which they were received. Subsidies are considered received on the last day of the claim period to which they apply.
If you received one or more of the above subsidies, make sure you understand how they affect your company's cash flow when it comes time to file your taxes.
Small Business Air Quality Improvement Tax Credit
This is a temporary, refundable credit designed to make it easier for small businesses to invest in more advanced ventilation and air filtration systems. Its main points are:
- The credit is equal to 25% of qualified expenses, up to a maximum of $2,500 per eligible site.
- The maximum permissible expenditure allowed for an eligible entity across all of its locations is $50,000.
- You must include the credit in your income in the same tax year that you claim it.
If your organization intends to invest in enhanced air filtration and ventilation, keep in mind that the credit is only available for eligible expenditures made before December 31, 2022. If you want to claim it, the help must be recorded as income in the tax year in which it is claimed.
The Canada Emergency Business Account (CEBA) loans are intended for Canadian small enterprises as well as certain non-profit organizations and charities. Before, the debt forgiveness repayment date was December 31, 2022, however it has now been postponed to December 31, 2023.
When received, the forgiving component of CEBA is taxable. But, it will be tax deductible if and when you repay it. If you repay any of the forgiving portion, you can subtract it from your total income for the fiscal year
COVID support program claims are being extensively audited by the Canadian Revenue Agency (CRA). As a result, ensure that you have all supporting documentation ready in case the CRA asks them.
Always collect receipts
To expand on the previous point, firms should always keep receipts for business-related expenses. This is especially crucial for small firms because tiny expenses can quickly mount up. Depending on the nature of the expense, you may be entitled to deduct it from your taxes. If the CRA requests proof, you can provide the original receipts.
Repay Shareholder Loans within 2 Corporate Year Ends
You do not have to include the borrowed amount in your income if you accept a shareholder loan from your firm and repay it in the same taxation year in which you borrowed. For example, if your firm bases its taxation on the calendar year and takes out a loan in May 2022, you have until December 31, 2022 to return it.
If you do not repay the loan within a year of the year-end on December 31, 2022, the entire loan amount will be included in your income. If the loan is repaid later than one year after the end of the fiscal year, the borrower can deduct the repayment amount from their income in the year they repay the loan.
Pay Your Family Wisely
Company owners who have incorporated their company can pay themselves and their family members salaries and dividends. Nevertheless, before you do so, consider the marginal tax rates of each beneficiary, your corporation's tax rate, and tax deferral benefits.
1.Tax on split income (TOSI) rules
There are occasions where you can share income among family members to save tax. TOSI rules, on the other hand, are highly complex. If you want to employ this technique, you should consult with a tax advisor.
2.Pay reasonable wages to family members
Employing family members, such as your spouse and children, can be a good tax-saving approach. For one thing, you can deduct those salaries as company costs. Second, if the family member is in a lower tax bracket than you, this technique may minimize the overall tax burden on your family.
However, there are a few things you should keep in mind if you are hiring family members:
- TOSI rules do not extend to salaries paid to family members. Pay your spouse or child a salary if they are actively participating in your firm. Wages paid to family members are not affected by TOSI laws.
- Pay only reasonable amounts: You should pay a family member the same as you would an unrelated employee. If the remuneration is excessive, the CRA may refuse the entire deduction.
- Make the payments real: Paying salaries electronically or by check is the most convenient way to keep track of them.
3.Withholdings on salaries paid to family members
If a family member works for your company, make sure all required withholdings for Employment Insurance, the Canada Pension Plan, and income tax are made.
Don't forget the small business deduction
Taxes are inevitable. But, knowing which company expenses can be deducted guarantees that you do not pay more tax than necessary.
Generally, all Canadian firms can deduct certain expenses as long as they are required to get the business up and running and to sustain it. Here are the most popular tax write-offs that can help you save money:
Small business owners can write off vehicle expenses such as:
- gasoline and oil
- parking fees
- toll charges
- repair and maintenance
- vehicle registration fees
- capital cost allowance (in case you own the vehicle)
- lease payments (in case you lease the vehicle).
If you are using the same vehicle for personal and business use, the CRA allows you to write off only those car expenses that you incur while doing business. Let's say you have an expense list similar to the one below:
- Gasoline and oil - $2,000
- License and registration fee - $150
- Car insurance - $1,150
- Interest - $620
- Maintenance and repairs - $380
- Total expenses - $4,300
You can only write off the percentage of these expenses related to earning a business income. If the vehicle was used half the time for business purposes, you can deduct:
50% x $4,300 = $2,150 as business expense.
The CRA recommends business owners maintain a logbook to record how much of their use was personal and how much was business-related.
Home Office Expenses
Small business owners working from home are eligible for following deductions:
- utility expenses
- internet charges
- property tax or rent
- repair and maintenance
- home insurance
Accounting and Legal Fees
If you hire an accountant, lawyer, or financial advisor for business-related purposes, you can write off their fees as business expenses.
The cost of renting office space for your company is tax deductible. If you've rented a building or one or more floors within a building, keep a file for rent receipts and the lease agreement. These will be useful in the event of a CRA audit.
Some advertising costs are fully deductible, while others you can write off partially.
- Your internet advertising expenses are totally deductible. These include, for example, the cost of developing a website, web hosting, and domain registration.
- Radio and television advertising may be completely written off for only Canadian stations. Advertising with non-Canadian broadcasters is not tax deductible.
- You may be able to fully write off the money you are spending on newspaper and magazine advertising with Canada-based newspapers and magazines. However, such costs are deductible only if the majority of the content space is used to provide journalistic information. At least 80% of the content area should contain journalistic material; otherwise, only 50% of advertising costs are tax deductible. If you spend money on advertising in non-Canadian newspapers and magazines, you can only deduct a portion of the cost.
Business insurance is essentially a contract in which the insurer provides financial protection to a company or individual against a covered loss or losses. There are various insurance policies that can be claimed as write-offs for small business owners, including:
- Life Insurance: Term and permanent life insurance coverage are available. Term life insurance is less expensive, but the coverage is limited in duration. Permanent life insurance, on the other hand, lasts your entire life if you pay your premiums on time. Most permanent life insurance policies can also be used as an investment vehicle, providing you with a pot of tax-free money in the form of a policy loan. Corporations can only deduct life insurance premiums when the policy is used as collateral fo
- General Liability Insurance: It protects your company from the costs of third-party personal injury and property damage.
- Key Person Insurance: It shields your company from the financial consequences of losing a valued employee.
- Business Property Insurance: You can deduct any typical commercial insurance premiums paid on business-related equipment, machinery, and buildings.
Machinery, computers, servers, software, furnishings, and other capital assets are examples of company assets. These assets cannot be written off in a single year; rather, they must be deducted over time based on the CRA's depreciation rates.
In 2021, the depreciation rates were:
- Software – 50% a year
- Computer equipment – 55% a year
- Building – 4% a year
- Furniture and fixtures – 20% a year
- Vehicle – 30% a year
Meals and Entertainment
In general, you can deduct 50% of these costs. For example, suppose you treat a customer to a $300 supper. You can deduct half of it ($150) from your taxable income as a business.
Only in a few cases may you get a full write-off. They are as follows:
- staff parties or events (for up to 6 such events a year)
- entertainment and meals expenses incurred for a fund-raising event for the benefit of a registered charity.
What kind of expenses can become tax-deductible when working from a home office?
If you run your business from home, chances are you can deduct a lot of expenses. Nevertheless, not all company expenses can be deducted in the same way. Pens, printer cartridges, paper clips, and paper purchased by your company in 2022, for example, can be totally written off.
But, you can only deduct the 'capital cost allowance' for any item that is a depreciable property according to the CRA. A vehicle owned by your company and utilized for business reasons is an example. If your company bought a car in 2022, it could only claim the capital cost allowance – not the whole cost.
Self-employed professionals working from home can deduct part of their maintenance costs like home insurance, heating, and electricity, provided they meet one of these two conditions:
- your home is the principal place for your business
- the space is used only for business purposes and is used on a regular basis
To determine how much deduction you can claim, consider two factors: the amount of space you use for your business and the amount of time you utilize it.
Assume you have an 1800-square-foot home and utilize the guest room (225 square feet) as your office and the basement (75 square feet) for storage.
In reality, you are using 16.6% of your living space to run your business. If your annual qualified home expenses total $20,000, you can deduct 16.6% of them (or $3,320). Keep in mind that you can only deduct $3,320 if you use the guest room and basement for commercial reasons.
This becomes more challenging if you use them for both personal and corporate objectives. In that situation, first establish how many hours you would utilize the area for commercial activities.
Assume you exclusively use the guest room and basement for business purposes for 8 hours per day. Divide this number by 24 and then multiply it by the figure that corresponds to the business portion of the residential expense to determine your overall deduction.
Total deduction is 8/24 x $3,320 = $1,107
Maximizing Your Tax Savings: Strategies for Business Owners and Home-Based Professionals
There are numerous strategies to reduce your tax burden, whether you own multiple offices or conduct your business from home. If you implement the tactics outlined above effectively, you can save a significant amount of money each year. If you require more professional assistance, contact an experienced financial advisor or accountant today.