Improve your bottom line with these tax-saving strategies from Desjardins tax specialist Dominique Renaud.
Decide on a year-end date
Businesses have the option of choosing when their fiscal year will end.
- If you elect to end your first tax year on November 30, you'll have to stick with that date in the future.
- You'll then have 6 months to file your tax returns. In this case, they would be due May 31.
Depending on the type of business you own, some dates may be better than others
- December 31 is often best.
- Businesses can lower their taxes for the fiscal year ending January 31, 2018, by paying a shareholder dividend or bonus in early January 2018
- Shareholders won't pay taxes on those dividends until April 30, 2019 (when 2018 taxes are due).
Incorporated businesses are taxed 17.24% on the first $500,000 of their taxable income (called the "business limit"). Income above the business limit is taxed at 26.7%.
"So a company's goal is to keep taxable income under the business limit (which may be shared in the case of associated companies)," says Renaud. There are many ways to do this
Pay shareholders a salary or bonus
If you can do this, it'll be considered an expense that will lower your income
Deduct often overlooked expenses
For example, if a shareholder's company doesn't have a place of business, it could pay the shareholder rent for the workspace it occupies. The rent would be considered income for the shareholder that they could eliminate by deducting their expenses:
- If the company takes up 10% of the shareholder's home, the shareholder could deduct 10% of their electricity, tax, insurance, maintenance and repair expenses from their rental income.
- If the business activities result in higher cellphone, internet or vehicle expenses, those could be deducted as well.
Split your income
It pays to have family. You can split your income by paying your spouse or children a salary. If you pay a family member $10,000 and that's their only income, they won't pay any tax on their salary. What's more, the salary will be a deductible expense for your business that will lower your taxable income. The salary has to be reasonable, however.
Pay a dividend
If your company earns investment income, it should pay you a dividend. "Your company could get a tax refund of up to 38% of the dividend," explains Renaud.
Here are a few great ways to lower your taxes:
Use the cash damming technique
If you have a personal loan with non-deductible interest, cash damming can help you save on your taxes. The concept is simple:
- Create new debt to pay your business or rental expenses.
- Use your business or rental income to pay down the personal loan.
- Since you're using the new debt to make money, your interest is deductible.
Deduct all eligible expenses
Incorporated and unincorporated businesses basically have the same expenses: business use of part of the home, personal vehicle and salaries paid to spouses or children.
Choose your dates wisely
If you plan to buy equipment or sell a building, make sure to time it right.
- If your tax year ends December 31 and you plan to buy a computer, you'll get a tax deduction faster if you make the purchase in December rather than in January of the following year.
- in the other hand, if you're selling a capital asset (such as a building), do it in January to put off the tax consequences of the sale.
If you've been in the black for a few years, you should seriously consider incorporating your business. "That way you can leave income in the company that will be taxed at a lower rate so you have more capital to use to reinvest in the company, pay down debt quicker or build an investment portfolio faster," explains Renaud.
New tax rules for 2018
Here's what you need to know about Canadian tax rules for businesses in 2018:
- For a company to be able to pay a shareholder dividend that is taxable at progressive income tax rates, the dividend must be reasonable given the hours worked or money invested in the company.
- If a company earns more than $50,000 in investment income, the income will affect its business limit and that of all associated companies.
- It's still possible for a passive shareholder to have shares in a company and use their capital gains exemption when the company's shares are sold.
- Companies now have two refundable dividend tax on hand accounts: eligible and non-eligible. If a company has a non-eligible refundable dividend tax on hand account, it must pay a non-eligible dividend to be entitled to its dividend refund.