Filing taxes is a basic part of running a small business. It’s helpful for you to know tips to make the most of federal and provincial deductions. Keeping track of your paperwork and working with an expert can help you maximize tax efficiencies.
On this page you’ll find
Personal versus business taxes
Business taxes are the taxes you pay on your business.
Personal income tax is the tax you pay on your salary. This is usually withheld from your pay cheque if you are an employee.
Most Canadian businesses pay both federal and provincial taxes.
Tax reduction tips
Keep track of your receipts
You can claim a portion of the expenses related to your business on your taxes. This includes if you run your business out of your home. Expenses you can claim include:
- Office expenses
- Part of your home insurance premiums
- Insurance premiums for any equipment related to your business
- Capital expenses, such as a computer
- Car expenses like mileage (if it’s related to your business)
- Maintenance and repairs
- Supplemental insurance (if it’s related to your business)
- Gas and parking
- Repairs if you had an accident while using your vehicle for work
- Part of your mortgage or rental costs
Taxes as a sole proprietor versus an incorporated business
If you have an incorporated business, you have more flexibility and access to tax deductions than if you are a sole proprietor. The income tax rate is lower for incorporated businesses compared to sole proprietors. Income earned by sole proprietors is taxed at their marginal tax rate. The Ontario General corporate income tax is 11.5%.
Incorporated businesses have limited liability compared to a sole proprietor. That means that a sole proprietor could have all their assets like a car and home seized. As a shareholder in your corporation, you are not personally responsible for debts, unless you gave a written personal guarantee.
Registered Retirement Savings Plan (RRSP)
If you are a sole proprietor or a partnership, you can use your RRSP contributions to lower the amount you pay in income tax.
Ontario small business deduction
The Ontario small business deduction reduces your corporate income tax on the first $500,000 of active business income of Canadian-controlled private corporations. The new lower rate on corporate income tax in Ontario is 3.2%.
Capital cost allowance
The Capital cost allowance allows you to claim a portion of capital assets due to the depreciation in value caused by wear and tear of items used in your business such as furniture or equipment.
If your expenses were more than your income, you may have a business loss which can be used to offset income. You can take the loss back three years or ahead for up to 20 years.
Manufacturing and processing tax credit
If your business is involved in farming, mining, fishing or logging, you can qualify for a tax credit that will reduce your corporate income tax rate to 10%.