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One way to maximize profits in your small business is taking steps to keep the tax bill low. Income tax is one of those things you simply cannot avoid if you run a business. But the best part is, you can find ways to reduce the amount of income tax you pay in order to effectively run your business in Canada. We’ll go through a few tips to help you keep your income tax on the lower side.

Don’t Lose Those Receipts

Those minor expenses you normally assume can quickly add up throughout the year and help you save a lot in income tax. Make sure you maintain receipts of all those purchases that are related to your business. Record the figures and keep them in a file appropriately.

Your RRSP Contribution

Though you don’t need to make the highest RRSP contribution every year in order to get tax benefits, managing this contribution can really help you to save on taxes. You need to figure out how much RRSP contribution to make every tax year, especially those low-income years when you can’t afford to make the maximum contribution.

 

Make Charitable Donations

Did you know that your business can earn tax credits if you donate to certain registered Canadian charities? In fact, if you donate more than $200, you can get even more tax credits because they are assessed at a high rate. Therefore, one way to lower your tax bill is to donate more to charities in Canada this year. You may even decide to give 5% of your income. If you’re doing this to also get tax credits, be aware that non-registered Canadian charities or political parties will not apply.

Split Your Income

Income splitting has been used as a reasonable tax reduction strategy. You can choose to transfer a portion of your income to your child or someone else who has a lower income in order to minimize marginal tax rate. For instance, you can employ your 19-year-old child and pay, say $15,000. He/she will have little income tax and therefore, have the ability to save for their education. This means that the $15,000 you’ve slashed off your income will decrease the amount of money that you owe the CRA.

Tax Deductions For Home-Based Businesses

Do you operate your business from your home? There are a number of income tax deductions that you can take advantage of to lower your tax bill. You can reduce a portion of certain home-related expenses such as electricity, home maintenance, and home insurance to lower the tax burden. You can also get tax deductions on property tax and mortgage interest if you own the property you’re living in.

Consider Incorporation

If your business is not incorporated, making this change can help to lower your tax bill. However, take this step if your small business has now grown to get the most of tax deductions after incorporation. Remember you’ll need the income to offset the cost of incorporation as well as dedicate a significant amount of your business earnings to the corporation for you to qualify for corporate tax deferral.

Tax Tips