Small Business Tax Deductions: How to Avoid Falling Into the “Association Trap”Small business tax deductions in Canada can be critical to a company’s success. Here’s how to avoid the “association trap”.

For those who own stock in a small company such as family business, there are a host of tax benefits, deductions you can claim, however, there are also some traps that you can fall into when it comes to what you are claiming off of your taxes versus what you are actually allowed to claim legally.  

While your tax deductions can help keep your small business profitable, falling into these lesser-known association traps can bring you a world of nightmares when it comes to your tax troubles. Knowing about these association traps and how to avoid them is key to keeping your taxes on track and in line with the law.

Understanding small business deductions for Canadian corporations

One of the biggest advantages for small businesses in Canada is the Small Business Deduction for Canadian Corporations. That tax break allows small businesses throughout Canada a massive tax break, only requiring them to pay 15.5% of their income in business taxes on the first $500,000 their company makes each year. Many small businesses who stay under that $500,000 limit can stay profitable thanks to this break. However, once a business makes more than $500,00 in income, the business tax rises to 26.5% in the providence of Ontario. 

This Small Business Deduction for Canadian Corporation helps many businesses save $1000s and helps keep them in business in the long run.

What is the “association trap”?

The association trap comes into play stating that businesses are not allowed to include many different corporations into one ownership group to receive multiple tax breaks. Business owners must realize that the tax laws in Canada say that if more than two (2) businesses are claimed to be “associated” they will have to share the $500,000 maximum threshold on their Small Business Deduction.

Being unaware of this law could cost you quite a variety of legal troubles including taxes and penalties that would get assessed to you for incorrectly filling taxes and “misleading” authorities to give your small business more tax deductions than those that you are entitled to take.

Understanding the small business tax laws of Canada will save you from falling into the “association trap” which can plague your business(es) with both fines and penalties as well as legal issues for years moving forward. For further assistance with filing your taxes as well as to ensure that you are not falling victim to the “association trap” please feel free to contact us.

E&E Professional Accountants has years of experience in assisting businesses with their accounting needs. We are founded and managed by an experienced corporate auditor and a former CRA tax auditor. Feel free to contact us for assistance with all your accounting and bookkeeping needs.

Tax planning services Canada

Hussein Ebrahimjee

Having worked for the Canada Revenue Agency (CRA) as a tax auditor and as Manager at a public accounting firm, Hussein brings along a wealth of experience in Tax planning, Compliance and public accounting.
Hussein Ebrahimjee