As a small business owner, you’re probably used to juggling tons of things at once. Creating a tax plan is a great way to prepare for the busy tax season. Here, we’ve compiled a list of simple, effective ways small business owners can optimize their tax planning strategies.
1. Income Splitting
In Canada, taxpayers are subject to a system of income tax brackets. A different tax rate may apply for each dollar earned, depending on which tax bracket additional income falls into. In other words, higher-income earners will have to pay higher tax rates on a portion of their income.
Employing
If you’re a business owner who can employ family members, you can help combat the tax implications of higher earnings by splitting your income with them. You can use available room in lower tax brackets through them and reduce your tax bill for the year.
It should be noted that family members on payroll should not be overcompensated. A good policy is to pay family members fair compensation for work performed.
Dividend Sprinkling
This strategy can be achieved by restructuring company shares. You can allocate different classes of non-voting shares to family members with the intention of paying dividends to those in the lowest tax bracket. As a result, the corporation’s income will be taxed at the lowest possible rate.
2. Optimize the Timing of Significant Capital Asset Purchases
Under Canadian tax law, capital assets are depreciated based on rules specified for several predetermined asset classes. While each class differs, the majority are subject to what’s known as the half-year rule. When this rule applies, businesses can only claim one-half of the annual depreciation in the year of acquisition.
Keeping this in mind, if you plan to purchase significant assets near the year-end date, you should do so before the fiscal year ends. With this approach, companies can use the full write-off much sooner. If the purchase of an asset is delayed until the coming year, you’ll have to wait a full fiscal year before you can use the maximum depreciation rate.
3. Compensation Split – Dividends vs. Salary
Over the past few years, the tax system has seen several changes. From a tax perspective, this includes reducing the difference between receiving dividends and salary compensation. The after-tax cash received at the individual level is about the same for wages and dividends.
Dividend Benefits for Canadian Pension Plan
But, those earning a salary are still subject to paying into the Canada Pension Plan (CPP). For many business owners, this means paying the maximum amount for both the personal and company portion of CPP. Today, the maximum contribution amount is just under $4,000.
Historically, those on payroll never receive dollar-for-dollar value for their contributions. Benefits received during retirement are typically only a fraction of the amounts contributed. As such, business owners on salary should consider taking dividends instead of wages. Under a dividend compensation approach, paying into CPP isn’t required. The dividend recipient can then take those proceeds and invest for retirement on their terms.
Salary Benefits for Registered Retirement Savings Plan
One caveat to this approach is that dividends don’t create contribution room in Registered Retirement Savings Plans (RRSP) like salaries do. Individuals seeking additional RRSP contribution room should consider a hybrid or strict wage approach to compensation. Discuss with your financial advisor to determine which approach is best for you to achieve your financial goals.
4. Home Office Expenses
If you work from home, you may be able to deduct a portion of your home office expenses, such as utilities, insurance, rent, or property taxes. However, there are eligibility criteria you must fulfill.
Home office expenses can only be deducted from business carried out in your home. It can’t be used to create a business loss. The portion of the otherwise deductible expenses related to a workspace that can’t be deducted in a taxation year can be carried forward as long as conditions are met.
Learn More
You can meet one-on-one with a financial expert to get specific information that applies to your business by booking an appointment with SBBC’s Ask an Accountant service now.
Small Business BC is Here to Help
SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our business articles.
