Year-End Tax Planning Tips for Business Owners
Tax planning preparations for business owners become critical to optimizing their taxes by taking advantage of several deductions and tax benefits.
So, how are business owners efficient in planning their tax filing this season? To make this labyrinth a bit easier for you, we have compiled an ultimate list of year-end tax planning tips for business owners. Here is everything you need to know.
Tip #1
Get registered for a CRA My Business Account
A business account with the CRA will help to integrate monitoring and reporting practices for your business’s year-end tax liability. This also helps you to stay informed of any local or federal tax incentives and credits for your industry. If your business qualifies for such rebates and incentives, the CRA My Business Account will be key for filing.
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Tip #2
Repay shareholder withdrawals
It is important to repay any loans from your business before tax season ends; otherwise, you will need to report the loan as a personal income and pay taxes accordingly. Let us understand this with an example.
Sam borrows $10,000 from his company before the tax year ends. What happens if Sam is unable to pay back the loan before the tax year ends?
In such a case, Sam will need to report the $10,000 as his personal income and pay taxes accordingly.
Tip #2
Pay yourself
Another great option to reduce tax liability for your business is to pay yourself. Paying yourself from the corporation is a great way to increase business expenses, which in turn lowers payable taxes for your business.
These payments to the owner can be made in the form of salary or dividends.
Do note that the salary is a deductible expense for your business and dividends are paid from after-tax profits.
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Tip #3
Pay your wife and kids
You can also ask members of your family, like your kids or spouse, to bill your business on an hourly basis. They can help with the administration, design social media posts, verify invoices and much more. This helps to shift the income of one individual in a high tax bracket to a family member in a lower tax bracket. Be sure to understand the TOSI rules clearly.
If you are considering this strategy for tax planning, do note that income splitting has become increasingly complex, so it is always advised to seek tailored professional tax advice.
Tip #4
Contribute to your RRSP
The Registered Retirement Savings Plan or RRSP, is not only a great retirement savings option for Canadians, but it can also be an invaluable tool for tax planning to save on year end taxes. Canadians are allowed to put in 18 percent of their previous year’s income or the current year’s fixed contribution limit. The fixed contribution limit for the RRSP was $29,210 for 2022 and $30,780 for 2023.
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Bonus tips
New tax incentives for depreciable asset purchases
Business owners can now take advantage of the new tax incentives offered for depreciable asset purchases. Some of the examples of this can be
- Replacing the roof on your rental properties,
- Investing in staging furniture,
- Upgrading your office appliances or electronics,
- Buying a new car, and much more
In case you are planning to get your hands on a brand new set of wheels, be aware that the CCA limits have been increased for both passenger ICE vehicles (from $30,000 to $34,000) and zero-emission vehicles (from $55,000 to $59,000).
Avail new multi-generational home renovation tax credit
Effective 1st January 2023, the multi-generational home renovation tax credit provides a one time tax refund for renovation costs for a secondary unit with a kitchen, bathroom and private entrance. Avail a flat 15 percent rebate for renovation costs of up to $50,000.
If you are planning to construct a secondary unit to accommodate seniors or adults with disabilities in the family, this multi-generational home renovation tax credit can be quite profitable.
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Offset capital losses
Many business owners with the right tax planning are benefiting from realizing capital losses to offset capital gains in 2022 or any of the three previous calendar years. Capital losses are now allowed to be carried forward indefinitely and used against any of the business’s future capital gains.
Do note that the trades must be executed latest by 28th December 2022. This is done to ensure that all trades are settled before December 30, 2023, since 31st December is a Saturday (non-working day).
Looking to know more about Canadian small business tax or need help with a tax refund in Canada or other bookkeeping services? Book a free consult with Lakshay today!