4 More Tax Planning Tips for Small Business
We’ve written about tax tips for small business before, but you can never have too many opportunities to save! Here’s another quick list of 4 more tax planning tips for small business in Canada.
Owning a small business keeps you busy with the crucial day-to-day operations, and there may not be room on your plate for thinking ahead to tax time and doing the necessary research to learn how to save. That’s why hiring an accountant is a good idea. Your accountant knows taxes, and they can give you sound advice about strategies that can make a big difference in how much you end up owing. Here are just four accountant-approved ways to lower your tax bill and save.
1. Pay yourself in dividends
Depending on where in Canada you live, you can earn up to $40,000 in dividend income before you start paying tax on it. For entrepreneurs just getting started, taking some or all of your income in dividends—depending on your cash needs—will reduce the amount you owe in taxes. However, this should be a short-term solution, since you’ll want to earn employment income to qualify you for RRSP contributions and the Canada Pension Plan.
2. Consider the structure of your business
The structure of your business can lower your taxes and even protect you from creditors. Setting up a family trust, for example, can reduce your taxes by shifting income to family members in lower tax brackets. Setting up a holding company that will own the shares of your operating company is an effective tax planning option, and you can even set up a separate company to own your property assets. Your accountant can help you create the ideal structure for your company based on the type of company you own, the assets you hold, and your unique circumstances.
3. Use a separate company for tax-deferred investing
In general, investments are made with after-tax money, but if you move funds out of your business and into a related holding company, you can take advantage of deferred taxes and invest the CRA’s cash just as you would your personal money. You’ll have to pay taxes eventually, but in the meantime, you’ll have a bigger pool of capital to invest and profit from.
4. Make family members shareholders
Splitting income with family members can slash your taxes, but the family members must actually be working for the company, and you’re required to submit paperwork to that effect. In certain cases, if you make your family members shareholders and pay them dividends instead, you can get around that requirement. A discretionary trust lets you decide whom to pay, how much to pay, and when to pay. This is particularly beneficial for business owners with kids in college or aging parents who need support, since the business will pay their costs directly. Having multiple shareholders is also beneficial for taking advantage of capital gains exemptions when it’s time to sell your business.
If you feel like it might be time to get some support with your accounting so that you can take advantage of tax-saving business strategies and ensure clean, accurate record-keeping, contact E&E Ltd. today. We’ll work with you to determine your best pathway to lower taxes.