Tax planning is crucial for businesses in Canada, to reduce tax liabilities, optimize cash flow and reinvest savings back into the business. A qualified corporate tax accountant Calgary can help you navigate all the tax deductions, tax credits and structuring options that when used correctly, can result in big tax savings. Here are some tax planning strategies Canadian businesses can use to minimize their tax.
1. Maximize the Small Business Deduction (SBD)
The Small Business Deduction (SBD) is a great benefit for Canadian-Controlled Private Corporations (CCPCs), as they get a lower tax rate on the first $500,000 of active business income. This lower tax rate can be huge savings which can be reinvested back into the business for growth. To qualify, a business must meet certain ownership and income tests, including being controlled by Canadian residents. Businesses should also consult a corporate tax accountant Ottawa to confirm eligibility and to structure their income to maximize this deduction.
2. Split Income
Income splitting is a tax strategy that can reduce overall family tax by shifting income to family members in lower tax brackets. While the Tax on Split Income (TOSI) rules have limited this, business owners can still split income under certain conditions. For example, family members who are actively involved in the business, those over 65 or those who meet other qualifying tests can still receive dividends or salaries and lower the total family tax. Planning income distribution within the family can make a big difference in tax savings.
3. Use Capital Cost Allowance (CCA)
Capital Cost Allowance (CCA) allows businesses to claim depreciation on capital assets, such as equipment, vehicles and buildings. By applying CCA strategically, businesses can spread the cost of these assets over time and reduce taxable income each year. Canada has recently introduced accelerated CCA rates for certain assets, particularly in areas such as clean energy and digital transformation, so businesses can write off a larger portion of the asset’s cost in the first few years. Timing asset purchases to coincide with the favorable CCA rates can create big tax deferral opportunities.
4. Claim the Scientific Research and Experimental Development (SR&ED) Credit
The SR&ED tax credit is one of Canada’s biggest incentives for businesses that invest in research and development (R&D). This credit allows companies to recover a large chunk of their R&D costs including wages, materials and contract expenses related to eligible scientific or technological advancements. SR&ED credits are especially valuable for innovation focused businesses and can reduce tax obligations big time. Even small improvements to processes or products can qualify, so it’s worth talking to an expert to see if this applies to you.
5. Incorporate for Tax Deferral
Incorporation has many tax benefits including tax deferral. Sole proprietors pay tax on all business income in the year, whereas incorporated businesses can leave income in the corporation and defer personal tax until funds are taken out. By keeping some profits in the corporation owners can access lower corporate tax rates and choose when to take income, align it with their personal financial needs and optimize tax rates. For high income earners tax deferral can reduce their effective tax rate on their overall income.
6. Plan for the Lifetime Capital Gains Exemption (LCGE)
The Lifetime Capital Gains Exemption (LCGE) is a tax planning tool for business owners who want to sell their business. For qualifying small business shares the LCGE provides a significant tax exemption on the capital gains from the sale so owners can potentially save thousands in taxes. Business owners should make sure they meet the tests for this exemption well in advance of a sale to get the most benefit.
Conclusion
Tax planning can make a big difference for businesses in Canada, so they can keep more of their profits and reinvest in growth. By using the Small Business Deduction, income splitting, accelerated CCA, SR&ED credits and the Lifetime Capital Gains Exemption, Canadian businesses can minimize their tax and increase their financial flexibility. Talk to a corporate tax accountant experienced in Canadian business tax to get the most benefit while staying compliant.
