Tax Credits in Canada for Small Business Owners
Separate from tax deductions, tax credits in Canada are a great help for small business owners, if you qualify for them. Here are a few that you may be qualified for.
Tax deductions vs. tax credits
For starters, it is important to note that tax deductions are not the same as tax credits. Meaning you can take advantage of both of them. Here’s a basic outlook of the two.
Tax deductions — These are allowable expenses reducing an individual’s or businesses’ taxable income. You can get tax deductions on everything from office supplies and promotion to rent, and advertising. A tax deduction has to be claimed against income earned during the year that the expense was incurred.
Tax credits — Now, tax credits, on the other hand, are reduced directly from the amount of tax that you would pay to the Canada Revenue Agency. To apply for tax credits, you have first to apply tax educations to your taxable income and then calculate tax owing. Tax credits will then reduce the amount on a dollar-for-dollar basis. For instance, if you are eligible to receive a tax credit worth $1000, you’ll save $1000 on your tax owing.
Common tax credits you can use
Most credits are intended to offset the tax liability of your businesses. However, others actually inject some money into your account. Here are a few that you should take advantage of if they are available for your business.
Investment Tax Credit
Investment tax credits (ITC) let you claim tax credits on qualifying expenditures or property investments you make on your small business. This includes bought assets such as machinery, buildings, and new equipment. The good thing about ITC is that you can still claim refunds on unused ITCs or get tax credits on investments from previous years.
You have the option of carrying forward any credits earned in tax years ending after 1997 up to 20 years, or you can carry back credit you’ve earned for up to 3 years.
Apprenticeship Job-Creating Tax Credit
If your small business has hired an apprentice, you are eligible for the apprenticeship job creating tax credit. This allows you to claim 10% of the individual’s wages, up to $2000 for each eligible employee.
In this case, to qualify, certain conditions must be met:
- The individual must be an eligible apprentice, working for you in a qualifying trade
- The apprenticeship has to be the apprentice’s first 2 years working in the trade.
- You have to register the apprenticeship with a federal apprenticeship program or your territorial or provincial government
To help offset any large tax bills, you can carry forward any unused credit 20 years or carry it back 3 years. For instance, if you’ve paid the qualifying apprentice $15,000, you can claim as much as $2,000.
If your current tax bill is large enough to warrant an offset, you can claim the tax credit on a previous tax return going back three years or save it for a tax year in the future when the tax bill is larger. You have to use this within 20 years after paying the apprentice.
Input Tax Credit
You can recover any Goods and Services Tax/Harmonized Sales Tax (GST/HST) paid on purchases or expenses related to your business by claiming input tax credits. However, to make a claim, you have to have a registered GST/HST number.
Make sure to monitor any GST/HST payable on business expenses and store any receipts as they might be required to support the claim
Scientific Research and Experimental Development Tax Credit (SR&ED)
With this, you can deduct any scientific research and development expenses from your taxable income. The SR&ED tax credit is usually at least 15%, and it can go as high as 35% of qualified expenditures. You can carry forward any unused ITCs for up to 20 years or back 3 years. You can also get extra grants and tax credits on SR&D from provincial governments.
The SR&ED tax credit is available to any size of Canadian Businesses, meaning even small businesses like sole-proprietorship and partnerships are eligible. This tax credit is usually refundable, so even if you don’t make any profits, you can still get your cash refunded.
Expenses eligible for tax credits
There is a wide range of expenses eligible for tax credits. According to the CRA, the most common of them include:
- Start-up costs
- Delivery and freight charges
- Business-use-of-home expenses
- Fuel costs
- Maintenance and repairs
- Motor vehicle expenses
- Office expenses
- Telephone and utilities
- Delivery and freight charges
- Meals and entertainment (partially)
- Professional fees, including Legal and accounting Takeaway
Tax credits can go a long way in reducing the money going out of your business. However, making claims on tax credits can be a pretty complicated process. For best results, you are advised to work with a professional.
If you’re looking for an experienced accounting partner who will help take your business to the next level, contact us for more information. Visit our blog for more articles, news, and updates about small business accounting, tax planning, CRA audits, and bookkeeping.
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