Ask an Expert: Tax Tips for Small Businesses in Canada

Being a small business owner comes with its own rewards like independence and creative ownership, but it also means you’re responsible for your taxes. While small business taxes come with their own nuances and structure, it doesn’t mean it has to be a burden. There are many ways you can lower your taxes and prepare for the future so that when tax season hits, you’re not surprised. The added benefit is that these strategies can also help heighten the financial readiness of your business.

In this Purolator Power Talk, Michelle Kraska, Senior Manager of Corporate Accounting at Purolator Inc. covers tax tips for small businesses, including how to reduce your tax burden, tax breaks to take advantage of, planning strategies, and how to build a strong financial foundation for business growth.

Learn how to effectively tackle your taxes as a small business. Check out the Purolator Power Talks podcast

Key Takeaways:

• How does your business structure affect your taxes?
• How can a small business reduce its taxes?
• 4 key tax planning strategies for small businesses
• Why is bookkeeping essential for small businesses
• Advice for managing taxes

How does your business structure affect your taxes? [0:40]

“Taxes do not need to be a source of stress,” says Kraska. “It’s an essential part of running any business large or small and creates the foundation to make the proper strategic decisions that aid your growth.” 

Kraska emphasizes that no matter what stage your company may be in, your type of business is a key factor in determining the taxes you pay. Here are the 3 most common business structures and their associated tax benefits. 

1. Sole proprietorship:

Run by one person, where the business revenue and expenses are taxed on a personal level. If your business has a larger profit, it will impact your income bracket and you’ll be taxed higher. The lack of separation between the business owner and business means that you hold all responsibility for business debts or lawsuits.

Tax Benefits of a Sole Proprietorship:

With a simpler structure, your taxes are easier to manage. Since you are considered a single entity, any losses can be used towards your personal income and can bring down your tax burden.

2. Partnership:

Generally, a partnership is two or more individuals or corporations that share all aspects of the business including profits, liabilities, and debts. Common examples of partnerships include law firms and co-owned businesses. The three subtypes of partnerships are:

• General partnership (GP)

A general partnership is most common and involves at least two business owners. A written agreement dictates how profit, liabilities, and debts are distributed among the owners. If there is no agreement, they are distributed equally. In a general partnership there is no protection from liability. 

• Limited partnership (LP)

A type of general partnership where there is a general partner with unlimited liability and sole responsibility of company management, who is supported by two or more partners with limited liabilities contingent on their capital contributions. 

• Limited liability partnership (LLP)

Limited to professional services that require a license for operation such as law firms and architect firms. In this type, all partners help manage the business and have limited liability.

Tax Benefits of a Partnership:

As a partnership, the business is not an entity which means profits are flowed through the individual partners and any losses can be put towards your personal income to lower your taxes. 

3. Corporations

Where the business and the owner are two distinct legal entities with their own assets and debts. In this situation, the owner does not have complete liability over the corporation and the business can exist once the owner has passed away or leaves. 

Tax Benefits of a Corporation:

Corporations are a great tax strategy because of the limited liability between the owner and business. As separate legal entities, this means this type of business has a different tax structure and has its own unique deductions and strategies available, and widened access to grants.

When should a small business incorporate?

If you’re a business offering more than just consultant or freelancing services, intend to hire employees, and predict business expansion that will generate more revenue than you need, then you may want it’s likely a good idea to incorporate. This can be an effective strategy depending on your business stage and long term goals, and Incorporation can also offer some protection from financial and legal risks. Here are some considerations to keep in mind before you incorporate.

Pros: 

• Limited personal liability

• Supports financing and longevity of business

• Increased credibility

• Widened access to grants and capital

• Decreased tax rate

Cons: 

• Additional paperwork

• Costly to incorporate

• Associated ongoing costs

• Financial losses can’t be used to reduce taxes

How can a small business reduce their taxes? [5:13]

According to a recent survey, only 48% of small business owners feel confident they’re correctly paying their taxes. This means that nearly half of small business owners may be paying more than they have to, and may be unaware of applicable write-offs. “Some of the ways that taxes can be alleviated from the businesses is strategizing,” says Kraska. “This includes making use of the deductions for your specific business type.” 

Here are Kraska’s top 8 ways to alleviate your tax burden as a small business in Canada.

1. File on time

For small businesses, the tax filing deadline in Canada is June 15 (or June 16 if the 15th falls on Sunday). Any money owed must be paid by April 30, or you will be faced with a penalty of 5% with an additional 1% every month. As a small business, it’s important to file before April 30 or by the earliest filing date of February 24 to reduce any unnecessary tax expenses.

Consult the Canadian Revenue Agency’s Personal Income Tax Page for the most accurate information on deadlines,  

2. Incorporate your business

If it makes sense for you to incorporate your business, you can take advantage of unique tax deductions. For example, corporations with an income less than 500K are subject to the small business deduction which is a lesser tax rate. 

3. Use of the tax deferral method (if incorporated)

Another strategy for corporations is the tax deferral method. “Because corporate tax rates are lower than personal tax rates, if you withdraw all the funds from your corporation, you’ll be taxed at a higher tax rate,” says Kraska. “If you don’t need those funds on a personal level, you can keep them in your corporation and push them for another time. The corporate tax level is lower, so you’ll have a lower corporate tax rate for that year until you withdraw those funds.”

4. Employ your family members

“If you have family members working with you in your corporation, you can utilize income splitting,” says Kraska. This strategy allows you to shift income from higher tax brackets to family members within lower ones. By doing so, you can alleviate your tax burden. You can also deduct their wages as a business expense.  

5. Claim any expenses and deductions

As a small business, you can deduct costs incurred by your business to help lower your taxable income. Throughout the year, keep clear and detailed records of all business transactions which should include expenses and their receipts, income, and invoices.

Here are top 5 write-offs for small businesses in Canada, according to Kraska.

1. Work-from-home expenses

• This includes rent, internet, utilities, mortgage interest, insurance and more. The amount expensed is proportional to the square footage of your working space to the square footage of your living space. 

2. Delivery and shipping costs

• If you are incurring any delivery, freight, and express costs during your business operations, you can expense these shipping costs.

3. Car and travel fare

• If your work requires you to travel and this generates business, you can deduct these costs from your taxes. This includes car maintenance, gas, and airline, bus or train tickets.

4. Professional fees

• If you are required to pay annual dues as part of your profession, you can deduct and claim these fees as part of your business expenses.

5. Software costs

• This includes any software used as you conduct your business such as Adobe, Microsoft, and Turbotax. 

For a full list of write-offs, consult the Canadian Revenue Agency’s business expenses list here.