For Canadian small business owners, tax planning goes far beyond filing returns and claiming obvious deductions. While most entrepreneurs are familiar with basic write-offs like office supplies and vehicle expenses, there’s a whole lot more advanced strategies that can help minimize tax liability and maximize profit. These strategies require working with a certified tax accountant Mississauga and understanding of how your business structure and financial decisions impact your taxes.
Here’s a closer look at some advanced tax strategies for Canadian small business owners.
Optimize Your Business Structure
Choosing the right legal structure for your business—sole proprietorship, partnership or incorporation, has big tax implications. Many small businesses benefit from incorporation due to the lower small business tax rate (around 9% federally on the first $500,000 of active business income, plus provincial rates).
Incorporation also allows for income splitting, tax deferral and more flexible compensation options. But the benefits depend on your income level, growth plans and operational needs. Worth consulting a Tax Accountant Edmonton to review your structure annually.
Pay Yourself Strategically: Salary vs. Dividends
As a business owner you can choose to pay yourself via salary, dividends or a mix of both. Each has different tax implications.
- Salary is a deductible expense for your corporation and contributes to RRSP room, but requires payroll deductions (CPP, income tax).
- Dividends are taxed at a different rate and don’t create RRSP contribution room but are simpler administratively.
The right mix depends on your overall income, retirement plans and whether you want to maximize CPP or defer tax. A balanced compensation strategy can save you a lot of tax over time.
Use the Lifetime Capital Gains Exemption (LCGE)
If you sell shares of your Canadian-controlled private corporation (CCPC) you may be eligible for the Lifetime Capital Gains Exemption, which allows you to shelter up to $1,016,836 (2024 amount, indexed annually) in capital gains from tax.
To qualify your corporation must meet specific criteria related to its assets and use in active business. Proper planning well in advance of a sale can help ensure your business is structured to take advantage of this powerful exemption.
Use a Holding Company for Tax Efficiency
A holding company can help shelter retained earnings, succession planning and asset protection. By moving excess profits from your operating company into a holding company via tax-free intercorporate dividends you can:
- Defer personal taxes
- Isolate investment income (which may affect your small business deduction if held in the operating company)
- Improve creditor protection
Be aware of the passive income rules introduced in 2018 which can reduce your small business deduction if investment income exceeds $50,000 annually.
Income Splitting (Where Permitted)
The federal government tightened income splitting rules with the Tax on Split Income (TOSI) but some opportunities still exist. For example:
- Reasonable salaries to family members who actively work in the business
- Dividends to adult family members who meet exclusion criteria under TOSI
- Income splitting with spouses in retirement through pension income
Make sure you follow the rules carefully, as improper income splitting can trigger big penalties.
Plan Capital Purchases with CCA in Mind
The Capital Cost Allowance (CCA) allows you to deduct the cost of depreciable assets over time. By timing purchases strategically (e.g. buying before year-end) you can maximize your first-year CCA claim thanks to the “accelerated investment incentive” and first-year half-rate rules.
Consult your accountant to coordinate purchases for optimal deductions without compromising cash flow.
Use Tax Credits and Grants
Many small businesses miss out on valuable federal and provincial tax credits including:
- Scientific Research and Experimental Development (SR&ED) credit
- Apprenticeship Job Creation Tax Credit
- Digital Adoption Program grants
- Provincial innovation and hiring incentives
These credits can provide thousands of dollars in refundable or non-refundable tax relief and should be part of your annual planning.
Conclusion
Small business tax planning in Canada goes far beyond basic deductions. By understanding and leveraging more advanced strategies, such as paying yourself strategically, using holding companies and qualifying for exemptions, you can reduce your tax burden and strengthen your financial position.
Working with a knowledgeable tax professional ensures these strategies are tailored to your business’s needs and compliant with current legislation. Smart planning today sets the foundation for a more profitable and secure future.
