Diving into entrepreneurship, either solo or as one of the 1.2 million small business owners in Canada, comes with its unique set of perks. The freedom to set your own schedule, choose your co-workers, and steer the focus of your business is invaluable.
Yet, a common hurdle for many Canadian entrepreneurs is navigating the complexities of tax planning for their businesses. Given the ever-evolving landscape of Canadian tax laws, it’s essential for you, as a savvy business owner, to undertake in-depth corporate tax planning strategies. This not only minimizes your tax burden but ensures compliance with the Canada Revenue Agency (CRA).
The Selkirk Wealth Management team at Wellington-Altus Private Wealth has seen firsthand how the demands of running a business can overshadow tax planning efforts. We recognize the hurdles you face and are here to support you with all your tax needs.
As 2024 unfolds, it’s more important than ever to stay informed and capitalize on tax planning opportunities tailor-made for the self-employed and business owners. Our guide is designed to demystify tax-saving strategies in Canada, focusing on the needs of business owners.
Let us help you navigate corporate tax planning effortlessly, transforming it from a daunting task into a strategic advantage for your business.
Talk to a Selkirk expert for personalize corporate tax planning advice
5 Must-Know Canadian Tax Planning Strategies for Business Owners
1. Maximize Home Office Deductions
With the rise of remote work, home expenses have become more relevant than ever for businesses. Canadian business owners can deduct expenses for the business use of a home—think about expenses like utilities, home insurance, mortgage interest, and property taxes.
The key is to ensure that the space is either the principal place of your business or used exclusively for earning business income and meeting clients. This strategy not only reduces your taxable income but also acknowledges the changing dynamics of modern businesses.
For more specifics – please refer to the CRA website.
2. Use Non-Capital Losses Effectively
If you haven’t explored non-capital losses as a way to save on your corporate taxes, you may be losing out on a key opportunity.
What are non-capital losses exactly? This term is used when your business expenses exceed your business income. These losses can be applied against other sources of income in the year they occur or carried back three years and forward up to twenty years.[i]
This flexibility allows business owners to strategically apply losses to minimize taxes over time, possibly providing a cushion during lean years and optimizing tax savings across profitable periods.
3. Make RRSP and TFSA Contributions Strategically
How do these tax strategy tools help business owners? Managing Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) contributions is a cornerstone of both personal and business tax planning.
For business owners, making contributions to an RRSP can reduce personal income tax, while investments in a TFSA grow tax-free, offering a way to save for the future without increasing your tax burden.
Balancing contributions to these accounts based on your current tax bracket and future income expectations can significantly impact your overall tax strategy.
4. Employ Family Members as Employees
Employing your spouse or child in your business can be a win-win situation. By paying them a reasonable salary for legitimate work, you can shift income from a higher tax bracket to a lower one, reducing your overall household’s tax liability.
This strategy not only helps in tax saving but also supports family members by providing them with income and potentially contributing to their CPP benefits.
5. Consider Incorporating Your Business
Incorporating your business unlocks several tax planning opportunities.
It allows for income splitting through dividends to family members who are shareholders, potentially reducing the overall tax burden.
Corporations also benefit from the Lifetime Capital Gains Exemption on the sale of qualified small business corporation shares, offering significant tax relief in the event of selling the business.
Finally, the ability to defer taxes on income retained within the corporation provides flexibility in managing personal and business finances.
Is Incorporating Right for You?
Incorporating a business offers key advantages like liability protection, tax benefits, and easier capital raising, making it a smart choice for businesses facing high risks or planning to expand. However, it’s not the correct move for every business owner.
For small or low-risk ventures, the simplicity and lower operational costs of remaining unincorporated might be more appealing. Sole proprietorships and partnerships allow for direct deduction of business losses against personal income, offering immediate tax relief during early-stage challenges.
Incorporation, with its regulatory requirements and administrative complexities, may not offer enough benefits to justify the costs and effort for these smaller operations, making it a less attractive option until the business scales or the risk profile changes.
Book a meeting with Selkirk Wealth Management to get personalized financial advice about your business
Sole Proprietorship vs. Partnership vs. Incorporation
We mentioned sole proprietorship vs. incorporation, but there is also another way to start a business in Canada: Partnership. Deciding the best structure for your business depends on various factors, including your business’s size, type, and long-term goals. Weighing these factors is essential in determining the optimal business structure for tax efficiency and overall success.
Here is a quick summary of the key differences between the three business models:
- Sole Proprietorship: A single individual owns and operates the business, directly responsible for all debts and obligations. This model is the simplest to set up and offers complete control, but it lacks liability protection. If the business goes into debt, your personal assets could be at risk.
- Partnership: Owned and operated by two or more individuals who share profits and responsibilities. Partnerships can be easier to manage financially with shared resources but involve shared liability. If you decide on a partnership, you must implicitly trust the other party and create legal agreements to protect both of you!
- Incorporation: A legal entity that’s separate from its owners, offering liability protection to its shareholders—they are not personally responsible for debts or legal actions. This model is more complex and costly to set up but provides significant advantages in terms of tax planning, raising capital, and protecting personal assets.
Discover More Corporate Tax Planning Strategies
Tax planning is an integral part of running a successful business in Canada. After reviewing these important tax planning strategies, you are more prepared to reduce your corporate taxes.
It’s good to note that these strategies not only help in immediate tax savings but also lay the foundation for the long-term financial health and growth of your company.
We understand how difficult it can be to invest enough time into implementing tax planning strategies as a busy entrepreneur or business owner. Staying informed of the constant changes is not always possible.
For the best outcomes on your personal and corporate taxes, consider consulting a financial advisor with broad experience in tax planning who can refer you to a network of professional tax specialists. With the right support in place, you can concentrate on what you excel at—managing your business.
At Wellington-Altus Private Wealth, our team Selkirk Wealth Management has a track record of aiding business owners and incorporated professionals that distinguishes us from other teams at competing wealth management firms. We are committed to helping you by creating bespoke strategies that consider your unique needs.
Start strategizing with Selkirk today and make sure you can secure your financial future and leave a lasting legacy.
[i] Line 25200 – Non-capital losses of other years – Canada.ca
