When you’re busy running a business, it’s easy to let tax planning take a back seat until the filing deadline is near, but you’ll be better off financially if you think of tax planning as a year-round activity. Here are some things you can do now to save money on next year’s tax return and set yourself up for long-term success.
1. Keep track of expenses
If you’re self-employed, you’re entitled to deduct any reasonable expenses that you incur to earn income from your business. If you haven’t always kept perfect track of your expenditures, now is a good time to start. Keep receipts for expenses such as meals and entertainment, memberships, subscriptions, advertising and promotion, salaries and wages, licences, office supplies, phone bills, vehicle expenses (including gas, insurance, registration, repairs, loan interest, lease costs, and car washes) and other costs.
If your home office is your primary place of business, keep track of costs such as mortgage interest, property tax, home insurance, utilities, repairs and maintenance so you can deduct these at tax time.
2. Take advantage of income splitting
Income splitting allows you to shift income from a high-rate taxpayer to a low-rate taxpayer, such as a spouse or child. Family members can either work for the business and be paid a salary, or be made shareholders and paid dividends. Since there are rules to keep in mind, consult your tax professional if you are considering this strategy.
3. Deal yourself more dividends
If you’re self-employed, you can choose to take some of your pay in dividends to take advantage of the lower tax rate. You will still need employment income to qualify for RRSP contributions and Canada Pension Plan, but you can earn thousands in dividend income before you start paying tax.
4. Get advice on structure
Family trusts and holding companies can be a highly effective tax planning solution for some businesses, offering a number of benefits from creditor protection to succession planning. Since there are a number of intricacies to consider with holding companies, it’s best to seek advice from a qualified tax professional.
5. Think about tax-deferred investing
Moving funds from your business to a related holding company can allow you to defer the tax on those funds, giving you a larger amount of capital to invest in the meantime.
6. Consider incorporation
Small business corporations are entitled to a low rate of tax on the first $500,000 of active business income, so for some businesses that have grown in size and profitability, doing business through a corporation can be an effective tax planning solution.
7. Other tax planning strategies
Depending on your situation, there are a number of other strategies that you might want to take advantage of. These include investing in an Individual Pension Plan, which is an investment vehicle that offers higher contribution limits than an RRSP; or setting up a Private Health Services Plan, which allows you to provide your employees with medical and dental benefits that are tax deductible to you. You can also invest part of your business’ retained earnings in a life insurance policy owned by the corporation that shelters the earnings from taxation and pays out to surviving shareholders tax-free.
Since business taxes can be complex and everyone’s situation is different, it’s important to seek the advice of a qualified tax professional. Getting advice early in the year can help you save money and sleep better at night by setting you up to be in the best possible position come tax time.
If you have any questions, or if you’d like to meet with us to review your current tax strategies, please don’t hesitate to contact us at 604-534-7701 firstname.lastname@example.org.