Each fiscal year, savvy small business owners constantly seek ways to reduce taxable income. There are some deductions that must be applied in the current tax year and other write-offs that can be used when you need them most. In times when cash flows freely into the coffers, the Canada Revenue Agency permits you to offset business income with allowances that carry forward from past years. Aside from taking depreciation on equipment purchases and receiving credits for charitable donations, you can also cut taxes by contributing to your retirement nest egg. A sound tax strategy requires you to assess where your business is, where it’s been, and where it’s headed.
About six to nine months into your tax year, you should have a decent idea whether it’s going to be a banner 12-month period or one that you’d rather forget. You can take revenues, subtract expenses, and project your income or loss for the balance of the year, and plan accordingly. In times when you expect substantial profits, it’s wise to take some of those earnings and pay yourself first and the CRA thereafter. Making contributions to your Registered Retirement Savings Plan lets you save for the future and reduce the amount of taxes owed when it’s time to file. The 2016 RRSP contribution limits max out at $25,370. Contribute what you can afford, pay less tax, and take one step closer to retiring comfortably.
Running a business presents a lot of uncertainty, especially when it comes to cash flow. There will hopefully be profits and there may have been struggles. Looking back on a good year might leave you scrambling for some ways to shrink your tax bill. In that instance, don’t forget about the lean years you may have suffered. The CRA allows capital losses from the past seven years to be applied toward the present period. So if your first few years in business resulted in a noncapital loss, where the company’s expenses exceeded its income, you can reduce present personal income with those losses.
Many small businesses employ young family members. Consider a tax-splitting arrangement in which you funnel business income to the next generation in the form of salary or wages. Your child will likely pay much less in income tax than the business at its marginal rate. As an added benefit, the money earned by a young son or daughter could be used to pay for a college education or a down payment on a house. Through tax-splitting, you reduce taxable income and help a loved one build a financial foundation. Success in business cuts both ways. You hope to earn as much as possible but also pay as little as possible to the CRA. Flesh out a sound strategy, execute that strategy, and along the way, seek advice from a tax professional. On smooth seas or through rough patches, take full advantage of all the tax code has to offer.