There are approximately one and a half million small businesses in Canada right now. The reason for such a significant number is the Canadian rules and regulations for small businesses. There are many official and legal ways to expand your small business in Canada. You can lower or reduce your small business income tax as well as several business costs. But for that, you will need the assistance of a professional accounting firm.Read on to find out the four best strategies to reduce your small business income tax in Canada.
1. Never Lose the Original Receipts
Sometimes when you are too busy ensuring the business operations, you forget to take care of small things. There are many small expenditures in any small business, such as buying coffee on the way to your workplace, or the parking fee when you visit a client, or maybe you took a client on a lunch. These expenses sound very little, but they could accumulate into a meaningful amount over the course of a year. You can maximize your tax deductions by ensuring that all these minor expenses are timely recorded while keeping all the original receipts.
CRA doesn’t accept credit card bills
Typically, Canadian Revenue Agency (CRA) doesn’t accept credit card bills or other proofs of expenditures. And that is why you need your original receipts at the end of a tax year. There are many small business bookkeeping services in Canada that help small businesses with their expenditure management and tax deductions management.
2. Utilize Tax-Free Savings Account (TFSA)
The best way to ensure maximum reduction in your small business taxes is the proper utilization of TFSA. TFSA includes income and capital appreciation using bonds, stocks, and other interest-bearing instruments. If you are also making Registered Retirement Savings Plan (RRSP) contributions, you can deposit your contributions in your TFSA. This way, you will be able to withdraw your contributions, earned interest, dividends, and capital gains as tax-free entities. However, there a few reasons to avoid contributing to RRSPs.
3. Split your Small Business Income
You will find many online platforms that suggest splitting income for small businesses as a viable tax reduction strategy. It surely reduces the taxes, but you should not be misguided by the structure of how you split your incomes. There was a time in Canada when you could hire one of your family members (on paper only) and could split half of your business income with them as their salary. But now CRA has made this process quite fair, and no more paperwork can save your income from being taxed at its marginal rate. However, you can ensure that if you hire any of your family members in your small business, they engage with the business actively (roughly 20 hours a week). And you will be able to split your business income in lieu of their interest and dividends but not the salary.
4. Get Professional Assistance
Small business owners often avoid using an in-house accounting or bookkeeping team. Instead, they hire freelance accountants and bookkeepers. That is why it is always recommended to only go for the best and professional accounting firms in Canada with experienced and certified accountants. You should know when to make use of the proper resources for your business. From bookkeeping to filing and reducing income taxes to a long-term tax-free savings plan, you can have it all when you use the proper professional assistance.
Make sure you always fully understand a strategy that you are going to apply for income tax reductions. Because sometimes, you may be using a non-suitable approach in your business without knowing its adverse outcomes. Consult an accounting firm for the best guides on tax savings.