Big tax tips for small business owners

Image by Pexels: N. Voitkevich

By Aurèle Courcelles, CFP, CPA

Special to Financial Independence Hub

Small businesses play a sizeable role in shaping Canada’s economy, contributing significantly to national employment numbers and our country’s gross domestic product (GDP).

According to Statistics Canada, in 2022 businesses with 1 to 99 employees made up 98 per cent of all employer businesses in this country. But today’s economic environment has triggered new financial challenges for this cohort. Canadian entrepreneurs can help offset the cost of rising inflation, rising cost of inputs, and rising interest rates, and keep more money in their pockets, by adopting some or all of these key tax strategies.

Consider employing your immediate family

Income splitting, whereby the higher-earner transfers part of their income to a lower-earning family member, can reduce the tax owed by your household. Consider paying a reasonable salary to your spouse and/or children for the services they provide for your business to reduce your tax obligations.

Incorporate your business

If your business generates more profit than you need to live on, incorporation is a highly effective tax strategy. It could lead to a significant tax deferral by qualifying for the lower small business tax rate for active income – the longer the profits are left in the company, the larger the tax deferral. If shares of the business are ultimately sold and are eligible for the lifetime capital gains exemption, the tax deferral gained through incorporation can create a permanent tax saving.

Other potential advantages of incorporation include having family members own shares (so as to have access to multiple capital gains exemptions) and possibly paying out dividends to actively participating family members who are taxed at a lower rate.

Maximize tax breaks with registered plans

Consider your RRSP contribution room when setting and reporting remuneration for services provided by yourself and family members who also work in the business. Employment income creates RRSP contribution room for the following year which, for 2024, can represent up to $31,560 of room. RRSP contributions are tax deductible, provide tax deferral and allow for business owners to diversify their future retirement income.  Contributing to a tax-free savings account (TFSA) can also work in your favor by allowing you to withdraw funds if needed without penalty.

Small, incorporated businesses can also explore establishing an individual pension plan (IPP). An IPP is ideally suited to business owners in their mid-40s or older who have a past history of earning employment income from their company in excess of $100,000 per year. An IPP may allow you to shelter even more earnings from tax than your RRSP, while offering some protection from creditors.  At the same time, the IPP can provide benefits to the corporation, such as if it has passive income over $50,000 or active business income over the small business limit.  The proposed increase to the capital gains inclusion rate also favors saving corporate profits in more tax-preferred options, such as IPPs and possibly permanent life insurance policies.

Time the purchase or sale of depreciable assets

If your business is going to be purchasing depreciable assets, the acquisition should likely occur prior to your business year-end. Accelerating the purchase provides two benefits: you’ll be able to claim capital cost allowance (CCA) as a tax deduction a year earlier (albeit likely at half the normal CCA rate due to the half-year rule), and you’ll be able to claim the full CCA rate next year since the half-year rule only applies in the year of acquisition. To be able to claim CCA, the asset must not only be acquired, but it must be available for use prior to year-end.

On the other hand, if you’re considering selling depreciable assets in your business that you’ve depreciated in prior years which would result in taxable recaptured CCA, it may be wise to delay the sale until after the business’ year-end. This allows for the business to claim one more year of CCA in the current year, plus you’ll defer the taxable recapture until the next year.

If you use your home or vehicle to earn business income, claim deductions

If you run your business out of your home or use your vehicle for business purposes, you may be able to claim certain home and vehicle expenses as tax deductible expenses.  As with many tax planning opportunities, the rules are complex and should be discussed with an advisor to determine what can be claimed, how it is calculated, and the supporting documentation needed to support the deduction.

A financial advisor can help with small business tax planning, including strategies for profit maximization, while also reviewing how taxes will play a role in your eventual plans to exit the business. They can also help streamline your business and personal financial plans to ensure they are synchronized and optimized.

Aurèle Courcelles is a Chartered Professional Accountant and Certified Financial Planner. He is Assistant Vice-President, Tax & Estate Planning at IG Wealth Management, where he supports high net worth individuals and private corporations with complex tax and estate planning issues.


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