Worried about the amount of income tax you’re going to have to pay this year? Whether or not you’ve been putting money aside for your tax payments, it can still be daunting looking at the red-coloured number staring back at you that should be your tax refund. Whether you’re a freelancer or own a small brick and mortar business, we’re sharing four strategies to help lower your small business income tax this year!
1. Good Record Keeping
One of the most overlooked ways that Canadian small business owners can save money come tax time is by collecting all your business-related receipts throughout the year. Many small business owners make the mistake of underestimating their expenses and in turn miss out on a lot of deductions.
The parking fee on the way to meet a client, the letters you mailed, the coffee you picked up for the office—all those little things add up over the course of the year, and can make up a decent amount of missed savings.
Using an accounting software on-the-go is the best way for small business owners to ensure they don’t miss a single expense come tax time. Kashoo makes it easy for you to snap a photo of your receipt on-the-go and enter the expense right on your mobile device. Record all of your invoices and expenses immediately after they happen so you never find yourself catching up records and digging up old receipts when it’s tax season.
2. RRSP and TFSA Contributions
The Registered Retirement Savings Plan (RRSP) and Tax Free Savings Accounts (TFSA) are excellent Income tax deductions for small business owners, particularly for sole proprietors or partners.
Depending on your income fluctuations year on year, you can decide whether you should make the maximum RRSP contribution for the year. If you have lower income one year, it may be smarter to carry some or all of your allowable RRSP contribution forward to years in which you expect a higher income.
If your run a incorporated small business, your RRSP contribution levels are based on earned income from salary. If you receive some or all of your income in the form of dividends, this will reduce or eliminate your RRSP contribution.
Another method to save on taxes is to place your income within a TFSA. As the name suggests, a TFSA will shelter your savings and investment income from taxes. It’s also a good option if you’ve maxed out your RRSP contributions and need a tax-free place to put cash or investments.
3. Capital Cost Allowance Claim
If you’ve made purchases for your business that depreciate in value, you can deduct the cost over a period of several years. These items could include furniture, office equipment, and even a building. Different assets are deducted at different rates so make sure you do your research as to how to calculate your deductions for specific assets.
The benefit here that a lot of small business owners may not know is that they don’t have to claim their Capital Cost Allowance in the year that it occurs. This means you can carry forward any unused portions to help offset a larger income tax bill in a later year.
You could also buy and sell your assets at the right time. You want to buy new assets before the end of the fiscal year and sell old assets after the current fiscal year. Buying your pricier items at the end of the year means you can claim a full year’s worth of depreciation sooner, even though you’ve only had the item for a few weeks or even a couple of days.
4. Charitable Income Tax Credits
A great way for small business owners to lower their income tax while giving back is by donating to a registered Canadian charity. Donations that total over $200 provide you with even more of a tax credit because they’re assessed at a higher rate.
To calculate your charitable tax credit, you first have to determine your charitable tax credit rate. There are two charitable tax credit rates for both the federal government and the provinces and territories that you’ll have to take into consideration.
Kelly lives in British Columbia and donated $400 to registered Canadian charities in 2017.
- The federal charitable tax credit rate is 15% on the first $200 and 29% on the remaining $200. Her federal tax credit is therefore (15% × $200) + (29% × 200) = $88.
- The provincial charitable tax credit rates for British Columbia for 2017 are 5.06% on the first $200 and 14.70% on the remaining $200. Therefore her provincial tax credit is (5.06% × $200) + (14.70% × $200) = $39.52.
- Her combined charitable tax credit is ($88 + $39.52) = $127.52.
Don't let tax season catch you off guard this year. Make sure you are budgetting for your taxes and maintaining good bookkeeping practices so that tax season doesn't push you over the edge. Execute these four strategies to ensure your income tax payment is at a minimum.
Alternatively, if you are sick of being stressed out every tax season, book a call with one of our bookkeeping specialists, and see if Kashoo can take bookkeeping off your plate—for good.