How can you pay less taxes in Canada as a business owner?
Stay updated with current accounting standards, business compliance, tax preparation tips, and latest news.
23 Apr 2024
CPA in Surrey Canada put great emphasis on keeping records of business transactions. Why? Because many of them can be deduced from taxable income only if the supporting documents are there for the transaction.
We’ve listed some common deductions that businesses fail to secure due to a lack of keeping a good record of them. Here they are:
Deductions:
For an incorporated business, you can draw income in two ways: by paying yourself a salary or dividends. How can any or both of them reduce the tax burden for your business?
Let’s find out!
Salary is something you’ll receive as a regular payment for your employment in the corporation. It will be taxed like regular income on your marginal tax rate, and the organization will deduct it from its taxable income.
Canada Pension Plan (CPP) contributions will be made by your employer (the company) for the contribution you’ll make from your salary.
Dividends, on the other hand, are payments made to shareholders of the company from its profits. These are not deductible for the corporation, but shareholders can receive a tax credit on this amount.
Due to this, sometimes dividends prove to be more tax-efficient for the shareholder than a salary.
For a startup or SME owner in Canada, tax planning is instrumental. Keep yourself updated to have an informed discussion with a chartered professional accountant BC regarding your tax situation.
You can also get in touch with accounting and tax experts at CJCPA who have helped businesses stay on top of their finances with their decades of experience. Apart from helping businesses maximize their business income, they have successfully reduced taxable income.
To find out how your startup can improve its financial health, book your free consultation with us now!
How can you pay less taxes in Canada as a business owner?
Knowledge is power when it comes to business taxes. Awareness of the right accounting services, taxation tips, and business practices can save you money in the long run. After serving the industry as chartered professional accountants for decades, we know what can work for startups and SMEs dealing with tax planning issues. Check out our top 3 tips that will help you save more money on taxes in Canada:Get incorporated
Incorporating your business in Canada can offer you various benefits, such as lower tax rates on eligible dividends and the ability to defer taxes on reinvested profits. Here’s an explanation: Corporations in Canada have to pay a flat tax rate on their profits. However, corporations also distribute a part of their profits as dividends to their shareholders, who receive tax credits. Thus, as an incorporation, distributing dividends lowers the overall tax burden on the profits of the business. Also, if a corporation chooses to reinvest its profits back into the business instead of distributing them as dividends, the reinvested amount will not be taxed. Due to this, corporations can grow their capital base and increase their future profits without attracting tax on their income. Finally, shareholders who are also employees of the corporation can get a reasonable salary. This salary is a tax-deductible expense for the corporation. Besides, the corporation can also offer benefits like health insurance or a company vehicle. In both cases, you are likely to reduce your taxable income rather than provide the same income directly to the owner of a business, which isn’t an incorporation. If you are indecisive about whether or not to get incorporated, check out our blog, Corporation vs. Sole Proprietorship, and make an informed decision. Consult with an accounting firm in Surrey (if your business is incorporated in BC) or seek our free consultation to find out if incorporation is the right choice for your business.Claim eligible deductions and credits.
CPA in Surrey Canada put great emphasis on keeping records of business transactions. Why? Because many of them can be deduced from taxable income only if the supporting documents are there for the transaction.
We’ve listed some common deductions that businesses fail to secure due to a lack of keeping a good record of them. Here they are:
Deductions:
- Utilities and internet costs
- Interest on business loans
- Office supplies and equipment
- Marketing and advertising expenses
- Professional fees (accounting, legal)
- Salaries and wages paid to employees
- Rent or mortgage for your business premises
- Investment tax credit for clean technology
- Scientific research and development (SR&ED) credit
- Canada training credit for employee training expenses
- If you don’t use deductions, you would pay tax on the full $100,000, resulting in a tax bill of $20,000 (100,000 * 20%).
- If you use deductions, you only pay tax on the $70,000 taxable income, reducing your tax bill to $14,000 (70,000 * 20%).
Pay yourself a salary and dividends.
For an incorporated business, you can draw income in two ways: by paying yourself a salary or dividends. How can any or both of them reduce the tax burden for your business?
Let’s find out!
Salary is something you’ll receive as a regular payment for your employment in the corporation. It will be taxed like regular income on your marginal tax rate, and the organization will deduct it from its taxable income.
Canada Pension Plan (CPP) contributions will be made by your employer (the company) for the contribution you’ll make from your salary.
Dividends, on the other hand, are payments made to shareholders of the company from its profits. These are not deductible for the corporation, but shareholders can receive a tax credit on this amount.
Due to this, sometimes dividends prove to be more tax-efficient for the shareholder than a salary.
The Tax Advantage:
To understand the differential tax treatment between salaries and dividends, we’ll take an example: Assumptions:- Corporate profit: $100,000
- Assume a high personal tax rate of 40%. chartered professional accountant BC
- Salary: $100,000
- Personal income tax on salary: $100,000 * 40% = $40,000
- Corporate tax (assuming a 20% rate): $100,000 * 20% = $20,000
- Total tax paid: $20,000 (corporate) + $40,000 (personal) = $60,000
- Salary: $50,000
- Corporate tax on profit remaining after salary ($50,000): $50,000 * 20% = $10,000
- Dividend: $50,000
- Dividend tax credit (the exact rate depends on your province): Let's assume a 15% credit for illustrative purposes only.
- Effective tax on dividend: $50,000 * (40% - 15%) = $12,500
- Total tax paid: $10,000 (corporate) + $12,500 (dividend) + $20,000 (salary on the remaining $50,000) = $42,500
- The optimum split between salary and dividends depends on many factors, such as personal tax bracket, province of residence, CPP requirements, and more.
- Don’t forget there is a “reasonable salary” condition, which is why CRA can challenge an unreasonable amount of salary and reclassify it as dividends.
Wrapping Up!
For a startup or SME owner in Canada, tax planning is instrumental. Keep yourself updated to have an informed discussion with a chartered professional accountant BC regarding your tax situation.
You can also get in touch with accounting and tax experts at CJCPA who have helped businesses stay on top of their finances with their decades of experience. Apart from helping businesses maximize their business income, they have successfully reduced taxable income.
To find out how your startup can improve its financial health, book your free consultation with us now!
