Business enterprises form the backbone of the Canadian economy. However, they often need help controlling cash flow and managing expenses and revenue, which affects their tax obligations. Taxes can be a stressful hurdle for many business owners. Thankfully, there are several strategies that businesses can use to reduce their tax liability and amount owed.
Understanding your Business Structure
As a business owner, it is imperative to identify the type of business, whether it is a proprietorship, limited partnership, or a corporation. The most common objectives entrepreneurs focus on are simplicity of operations, flexibility, and protection from risks and liabilities.
As a business owner, your main goal is identifying how legal entities affect your tax obligations. For example, for sole proprietors the individual and the business are considered one and the same. The net profit is usually added to the amount earned during the year, and is subject to federal and provincial tax rates.
Business partnerships are not usually taxed directly; the revenue passes through the partners. Each partner must declare and include their share, depending on their contractual agreement. In this case, they are taxed by the applicable tax percentage.
Corporations are taxed differently because they are considered legal entities from other shareholders. The business usually retains the revenue until the funds are distributed to the stockholders. The basic federal tax rate is 38 per cent, but is reduced to allow provinces and territories to impose a corporate income tax.
Before you file, carefully evaluate the suitable tax structure for your business. Whether you are an entrepreneur, business owner, or investor, there’s no better feeling than saving money on your taxes. So, what strategies can you use? Consider a few.
Many entrepreneurs are caught up with managing their daily business, and sometimes, they need to pay more attention to regularly review their income. Tax planning is an ongoing process. Consulting an accountant or a professional financial expert can keep you informed and updated on your expenses.
Keeping accurate records is the foundation of effective tax planning. Excel spreadsheets can help you summarize data effectively. Classify and itemize expenses into categories like office supplies, bank charges, accounting fees, and incoming and outgoing expenditures. Substantiate your data by keeping track of receipts and invoices, regardless of their value.
Another important feature of record keeping is separating business and personal expenses. Maintaining separate bank accounts for each credit card account you use is advisable. This makes it easier to monitor all your expenses when you conduct an audit.
You can claim tax deductions on many variables. The deduction must be directly related to the business to qualify as a write-off. For example, suppose meals and entertainment are allowed at client meetings. In that case, work must be discussed before, during, or after the meal and conducted in a conducive environment for business meetings.
If you work from home, an owner can deduct a portion of home-related overhead costs, including utilities, maintenance, insurance, property tax, and mortgage interest. The Canada Revenue Agency usually calculates this by determining the workspace percentage against the home’s total size.
Transportation can also qualify as a deductible. If you are using your personal car for business purposes, a certain percentage of gas costs, insurance, lease, and auto repairs can be written off. It is crucial to record and track the total incurred mileage when visiting customers or attending client meetings.
Sometimes, businesses might overlook recording a profit for a few years consecutively. In this case, proprietors can use non-capital losses to decrease income tax. The accepted practice is “three years back, seven years forward,” which means that losses can be carried back as far as three years or carried forward up to seven years.
Set up a Registered Retirement Savings Plan (RRSP)
A registered retirement savings plan is usually registered with the government, it is a plan that you regularly contribute to for retirement purposes. When you contribute money to an RRSP, your funds are taxed-advantaged, which means they are exempt from taxation in the same year you make the contribution in. This allows you to save for retirement.
File on Time
Filing your taxes on time is an effective strategy to save money. It allows you to avoid penalties and interest charges. After all, every dollar you make is hard-earned. Implementing these strategies will allow you to keep much of your earnings.
Zaida Ricafrente | Contributing Writer