As a small business owner, there are tax advantages that are available to you, which are not available to individuals. The basic tax advantages are the ability to write off business expenses for entertainment, vehicles, and office supplies. However, there are some tax advantages that most business owners overlook and could be eligible for.
If your business has grown in size and profitability, you might want to consider converting the business into a corporation. A corporation is entitled to a low rate of tax at 15% on its first $500,000 of active business income. This can make sense particularly when you’re able to leave some of your earnings in the corporation without paying it all out to yourself as salary or dividends. Instead of a TI tax form, corporations need to file a T2 tax return every year.
RRSPs and Other Registered Plans for Retirement
One way to lower your tax liability through your business is to establish a retirement plan, like an RRSP or Group RRSP if you have employees. The T4040 CRA Tax Guide describes all the different plans available to self-employed individuals, as well as plans that can benefit a larger business with several employees. For plans where the business contributes to its employees, that contribution can be taken as a tax deduction. For self-employed individuals, an RRSP is a great way to add money for your retirement that gives you an immediate tax deduction for your individual tax return. Plus, retirement plans have other benefits for your company. For example, if you establish a matching program for a group RRSP, it can be used to both attract new talent as well as retain existing employees.
Deduct Home Office Expenses
If you work primarily out of your home or use your home when you are meeting clients, then you can be entitled to deduct a portion of some of your home-related expenses. When you work from home, many of your normal home expenses can now be partially considered business expenses, like mortgage interest, property taxes, home insurance, and utilities. When calculating expenses from your home office, you are not allowed to declare a loss for the year, but you are allowed to carry forward losses to deduct future tax return income. For your home to qualify as a “work-space-in-the-home” expense, it needs to be the place you work over 50% of the time. The Canada Revenue Agency requires that you sign a Form T2200, Declaration of Conditions of Employment form as well as completing the Form T777, Statement of Employment Expenses form.
Working Income Tax Benefit (WITB)
For self-employed individuals and families who have a lower income may qualify for the working income tax benefit program, which is a refundable tax credit. For example, to be eligible for the tax year ending in 2015, a family with children, a family without children, and an individual with children cannot make more than $28,209. An individual without children cannot make more than $18,292. To make the claim, place it on Line 453 of your individual tax return.