Self employment offers many advantages to owning a small business. Canada Revenue Agency (CRA) offers many tax savings and incentives to help the small business owner. Here are a few tax planning tips and ideas.
One of the simplest tools is a calendar. Utilize your calendar to track all your monthly activities for important dates and deadlines. A few examples to schedule on your calendar are pay payroll dates, GST/PST payments, tax installment payments, as well as statutory holidays. Most online calendars can be set up to automatically send you a message in advance of upcoming deadlines.
Receipts for business related activities
A good method to keep track of all your receipts is to store them in one place. One example is to have an accordion folder that has a slot for each month. As you collect each receipt, place them in the correct month. This keeps them organized and easy to record on your bookkeeping system.
Note: a credit card statement is not considered proof of purchase. CRA requires the original receipts showing purchased and the amount.
Forgotten receipts are purchases that seem little and insignificant. They are just as important and do add up quickly. Examples include parking receipts or coffee you purchase to meet a client. Think about all the “small” receipts that can add up over a year. To get the most benefit from tax savings is to include these receipts.
RRSP and TFSA Contributions
Registered Retirements Savings Plan (RRSP) and Tax Free Savings Accounts (TFSA) are particularly excellent for sole proprietors and partners to take advantage of Income Tax Deductions for Small Business Owners.
Sole Proprietor RRSP Contributions
The amount of RRSP contributions all depends on how much income fluctuates from year to year. For tax savings, RRSP contributions are based on the marginal tax rate. The allowable RRSP contribution can be carried forward into subsequent years. Consider a strategy of contributing more when you are expecting a higher income that could push you into a higher marginal tax rate.
Maximize non-capital losses
Non-capital losses are expenses that exceed business income in any year. Consider using this loss to decrease income tax owed. A few optional non-capital losses can be used to;
- Offset other personal income in any given year
- Carried back three years to recover income tax already paid
- Carried forward up to seven years to compensate a large tax bill in the future
Maximize charitable income tax credits
Charitable donations receipts from registered Canadian charities earn you tax credits. The more you give to registered charities, the higher tax credits for you and more fortunate for the charities.
Note: only receipts that are from registered Canadian charities qualify for tax credits.
Maximize Capital Cost Allowance (CCA) income tax claim
Capital Cost Allowance claim is the ability to deduct the cost of depreciable property (equipment, vehicles, office furniture, etc.) over a period of years. The CCA is not a mandatory tax deduction and provides flexibility when it is the most suitable to use as much or as little in each tax year. A strategy is to carry forward any unused portion to help offset a larger income tax bill in the future. Hold off using CCA claim deduction when there is little or no taxable income.
Buying and Selling Assets
An important strategy to maximize your CCA claim is buying and selling assets. Buy new assets before your fiscal year end and sell old assets after your current year end.
Home-based business tax deductions
There are lots of advantages to operating a small business from your home. Home-based businesses can deduct a portion of several home related expenses. A few examples are heat, electricity, maintenance, vehicle maintenance and gas, insurance, property tax, mortgage interest, furniture, and office equipment. You can also claim the space you use for your small business as a deduction.
Every year there are changes to the Canadian tax system. To stay current consider developing short and long term tax planning. Banka & Company, CPA has helped many sole-proprietors with their tax planning that works specifically for their needs. Contact us today to find out how we can be of assistance for your small business.