Come tax season, small business owners and self-employed individuals should always check the tax credits available to them. As part of the annual filing process, companies can file for these credits, which will reduce the amount of tax they must pay to the Canadian government.
Researching and applying credits must be done every year to ensure eligibility and proper application for your taxes. So how can your business go about securing tax credits?
What is a Tax Credit and How Does it Work?
In essence, a tax credit is an allotted amount of money that can be subtracted from the total amount of taxes you and your business owe the government. There are various types of credits available to individuals, self-employed, sole proprietor and partnership businesses, and corporations.
Tax Credit vs. Tax Deduction
A tax deduction reduces a person’s taxable income, whereas a credit is a direct reduction in tax. Business expenses can be deducted from your returns. These small business tax deductions are also known as tax write-offs, which are only worth a percentage of its total worth in tax savings. A credit, on the other hand, is worth the full amount of its value. If you receive a credit worth $250, then you will save $250 on your return.
Federal and Provincial Level Tax Credits
Businesses can secure tax credits at the federal level and the provincial and territorial levels. Depending on where you are located, there are various extra credits you can apply for. The Canada Revenue Agency (CRA) offers further information on the different provincial and territorial credits available.
Common Tax Credits for Small Businesses in 2020
1. Apprenticeship Job Creation Tax Credit
The AJCTC is a non-refundable credit employers can claim on their individual income tax return when hiring an apprentice. For eligibility, apprentices must be working in a prescribed trade, within the first two years of their apprenticeship contract, which must be registered with a federal, provincial, or territorial government program.
2. Union Dues Tax Credit
Non-refundable credits are available in the province of Québec for employees and self-employed individuals who paid union, professional association, and commission dues in the last tax year.
3. Film, Digital Media, and Television Tax Credits
In Ontario, there are a whole slew of credits available for businesses that work in the film, digital media, and television industries. For example, the Ontario Production Services tax credit offers business a credit based on production expenditures within an Ontario establishment. Small business owners can learn more about specific Ontario tax credits.
4. Ontario Book Publishing Tax Credit
This provincial book publishing credit offers businesses a refundable credit of 30% on qualifying expenditures incurred within the specified fiscal year for literary works published by Ontario companies. The maximum amount the credit covers is $30,000 per work, and can only be applied to Canadian-controlled corporations.
5. Medical Expense Tax Credit
This non-refundable tax credit is applied through an individual’s personal return. Eligibility for this medical expense credit is based on low income and high medical expenses.
6. Small Business Investor Credit
There are various ways to become eligible for the investment tax credit. This credit can be carried backward or forward depending on the circumstances, reducing tax at a federal level. There are also specific provincial investor credits that can be claimed, such as in New Brunswick.
7. Business Research Tax Credit
This refundable credit is applicable for businesses that conduct scientific research and development and self-employed individuals that work with these businesses. A small business owner can claim this research credit on qualified expenditures.
8. Charitable Donations Credit
Canada provides generous non-refundable tax credits for donors of charities. The credit amount will depend upon the charities donated to, as well as the total donated sum. Only specific types of organizations can issue official donation receipts, which will qualify you for this charitable credit.
Per year, a person may claim any donations previously unclaimed in the last five years. Find out how much you could save on your return with this Charitable tax credit calculator.
Small Business Credits Come Tax Time
Understanding your business’s cash flow can help you secure applicable tax credits that will save you money during tax season. Track and categorize your expenses with QuickBooks to make the filing process easier. Keep tabs on all of your accounts to ensure you obtain the best credits available for your small business.