As the financial year of your small business winds down and you begin to plan for next year, see if there are ways to minimize your taxes for the current year. Follow these simple tips to leave more money in your pocket at tax time.
Accelerate Expenses and Delay Income
A tax dollar deferred is a tax dollar saved. The Canadian tax system is based on an annual reporting of income. The reality of business, however, is that income and expenses have nothing to do with how long it takes the Earth to circle the sun. Take advantage of this dichotomy by doing two things: Accelerate some expenses, and defer some income.
If your cash flow allows it, stock up on supplies and pay all of your bills in the last days of your tax year. This way, you can deduct them from your income right away, causing an instant tax reduction. For example, a company that has a December 31 year end and purchases something on December 30 can deduct it from its current year. Waiting just two days and purchasing the same item on January 1 would mean it can only be deducted 12 months later at the end of the next financial year.
Conversely, income is normally taxed in the year it is earned. In the example above, the company could consider the possibility of billing its clients on January 1, rather than December 31, to defer inclusion and taxation of the income until the next year. Depending on the type of accounting system you use (such as inventory or work-in-progress) this may or may not be possible. Consult your tax professional to see what can work for your particular situation.
Capital Assets and Depreciation
Take a look at the capital assets on your balance sheet and their levels of tax depreciation. If you have not claimed the deduction for capital cost allowance in the past and the asset has lost value, perhaps you can claim it this year. On the flip side, if some assets are heavily depreciated but have held their market value, you may want to not sell them in the current year to avoid costly recapture.
Depreciation for accounting purposes and depreciation for tax purposes are not the same; the two can have very different rates. Make sure to use the correct rate.
Maximize Your RRSP Contributions
Contribute as much as possible to your Registered Retirement Savings Plan, since that is one of the few legal tax planning opportunities in Canada. If your small business has a December 31 year end, consider the possibility of paying yourself a bonus on the last day of the year and transferring it directly to your RRSP. This way, the company will get an immediate deduction, and you will not pay taxes on the bonus.
When using this strategy, make sure to account for your payroll taxes properly, since the bonus is the equivalent of a salary.