So you’ve just completed your 2020 tax filing – congrats! While it may be tempting to put away the endless receipts and slips and not think about taxes for another year, don’t do it!
While the deck may be stacked against small businesses, there are still many tax breaks available to keep hard-earned money in your pockets. But simply filing a tax return at the end of the year won’t cut it anymore. Why act now? Taking these small steps could save your small business hundreds, if not thousands, of dollars come next tax season.
- Keep your Records Complete
The best, simplest (and yet most overlooked way) for small business owners to save taxes is by keeping their business records complete and well-organized. In fact, many small businesses pay far too much tax simply because they do not commit to a system that keeps track of and records their business expenses. Not only does this save money through a lower tax bill but it also protects you if the CRA auditors come knocking at your door.
If you are just starting out, the easiest way to keep track of business transactions is to have an envelope for each type of income and expense that your small business has, and place each receipt into its respective envelope throughout the year. As your small business grows you may want to consider moving to a software solution that can handle more complex business transactions. These software packages also provide you with valuable reporting tools that will help you better understand how your business is performing throughout the year.
- Split your Income
One of the keys to tax planning in Canada is the concept of income splitting. This is the process of maximizing income taxed at lower rates and minimizing income taxed at higher rates. While the federal government has already eliminated some forms of income splitting, there are still many legitimate ways to shift income from one tax rate to another depending on your business’ legal structure, family situation, and other factors. It is important to carefully plan your income splitting strategy well in advance of tax season.
- Track your Capital Assets
To operate any business, capital items like furniture, computers, office equipment and other useful assets are essential. These major purchases typically have a high up-front cost, but can often only be written-off over time for tax purposes. It is important to carefully consider the tax implications when making the decision to either purchase or sell a capital asset as there are significant tax savings to be had by timing these transactions correctly.
- Deduct Home Office Expenses Properly
If you operate a home-based small business, you may be eligible to deduct a portion of your home expenses that would otherwise not be tax deductible. These expenses could include things like mortgage interest, insurance, maintenance and repairs, utilities, and property taxes. As home expenses are only partially tax deductible, it is important to track them separately from your business expenses throughout the year. You may also want to consider where in your home to conduct business as this can have an impact on the tax savings available. This is especially important during COVID-19!
- Deduct Motor Vehicle Expenses
Deducting automobile costs is a very important part of tax planning for many small businesses, one that comes with many rules and restrictions. Generally, any expense incurred to operate a vehicle can be deducted, including: fuel, insurance, maintenance and repairs, interest, lease costs, and more. However, it is important to keep track of all business kilometres driven at the beginning, end, and throughout the year, along with all automotive receipts. Don’t forget to consider the tax implications when choosing which vehicle to purchase, whether to lease or purchase a vehicle, and whether to own your vehicle personally or in a corporation.
You should always consider seeking the advice of an expert to ensure that these tax saving ideas are right for you.
First Published February 2019 and updated for 2021.