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 taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition efficiencies.
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 insuranceHome insurance Insurance that covers your home and its contents against losses. Also covers you for accidents that may happen at your home.+ read full definition 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 mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition 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 taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition rate is lower for incorporated businesses compared to sole proprietors. Income earned by sole proprietors is taxed at their marginal tax rateMarginal tax rate The amount of tax that you have to pay on each extra dollar of income you make. As your income rises, so does your tax rate.+ read full definition. 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 shareholderShareholder A person or organization that owns shares in a corporation. May also be called a investor.+ read full definition 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 depreciationDepreciation The amount that something drops in value over time. Example: A home may go down in value if you don’t maintain it well. A car or a piece of business equipment will go down in value as it wears out.+ read full definition 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 rateTax rate The rate at which you or a business pays tax on income. Often stated as a percentage, such as 25%.+ read full definition to 10%.