Filing taxes can get a little complicated when you’re a business owner. When you work for yourself, each year can be different. And chances are, the COVID-19 pandemic caused its share of upheavals this past year.
The Canada Revenue Agency (CRA) has created a comprehensive guide to all COVID-related resources for businesses. Did your business access some of these programs, loans or subsidies? If so, you may want to check with your accountant how this can affect your taxes this year.
What business items can you claim on your taxes?
As a business owner, your income can fluctuate. Plus, you may have new clients with requests that require additional expenses. Not to worry. The CRA has a list of business expenses you can claim on your taxes. The list includes everything from advertising, to fuel costs, to business start up investments.
What about items that might be unique to your business? Or those everyday expenses that feel like a business expense but might not be? It helps to talk to a tax professional who can explain all the details.
- You can deduct rent and property taxes if your workspace is in your home. But, you can’t deduct mortgage payments.
- You can deduct the cost of certain office expenses like pens, pencils, paper clips, stationary and stamps. But, the list of approved office expenses doesn’t include items like calculators, filing cabinets, chairs or desks. You must capitalize and amortize these items.
How can you reduce the amount you pay in taxes?
So let’s say you’ve thoroughly reviewed the CRA’s approved list of operating expenses. How can you help reduce the amount you pay in taxes after you’ve claimed the usual line items? Here’s 4 tips for business owners to consider.
1. Make sure your business makes enough to deduct expenses
The CRA expects your business to have a “reasonable expectation of profit.” The CRA doesn’t expect that you will make money every year, and even allows that it could be several years after you start your business before you show a profit. But your business can’t look to the CRA like it’s a hobby or pastime; it has to be some sort of commercial activity.
For example, there was a recent judgment against a Quebec lawyer. She took a job with the federal government but kept her private practice on reduced hours. She claimed significant business deductions against her private practice not supported by her earnings. As a result, the CRA denied her claims.
2. Invest in yourself and your business
“You’re allowed to invest in the business,” says Alexandra McQueen, a Toronto-based certified financial planner. “And invest in yourself as part of the business,” she adds. This could translate into taking a training course or going to a conference. But keep in mind, you can only claim two conventions per year. According to the CRA, both must “relate to your business or your professional activity.” Each convention must also take place in an area where your organization normally conducts business. Most conferences and training courses are going virtual these days. You can still claim registration costs if these sessions meet the CRA’s other requirements.
3. Consider incorporating your business
It might make sense to incorporate your business.
Depending on your province or territory of residence, your corporation could pay tax at a rate ranging from 9 to 15% on the first $500,000 of active business income. You could also lower your personal tax bill if you pay yourself dividends instead of a salary. McQueen says that if you’re withdrawing the money as salary then you're still paying personal tax rates. Still, taking a salary may be worthwhile because dividend income doesn’t create RRSP contributing room or help build a pension for you under the Canada Pension Plan.
Incorporating your business also makes sense if you have income that you can leave in the corporation. Although that income will be taxed at a higher investment tax rate (around 50% depending on your province or territory of residence), the delay in paying the income out can save taxes. In recent years the government has put some limits on this strategy, so it’s best to discuss the tax ramifications of this strategy, and of incorporating your business and how to take income from it in general, with an independent tax advisor.
Not sure if this is the right choice for you? It can help to talk to an advisor. An advisor can help give you a new, objective perspective on your business plans. You can better understand the pros, cons and costs of each possible approach or strategy.
- Find an advisor near you. Most advisors now offer to meet Clients by phone or video chat.
- Why work with an advisor?
4. Get life and key person insurance
Consider corporate-owned life insurance options, including key person insurance for the business owner or shareholder. Permanent life insurance policies include a cash value feature. Your cash value includes investments that grow tax-deferred. This means you won’t have to pay tax on investment growth or interest earned until you pull money out. True to its name, when the insured person dies, key person insurance pays a tax-free death benefit to the business as the beneficiary.
- How much life insurance do you need? Try this Life insurance calculator to find out.
The death benefit is the amount of money paid to a beneficiary or beneficiaries when an insured person dies. That means at least part of the payment from the policy to the beneficiary is tax-free. The government doesn’t consider this taxable income when the beneficiary files their income tax return.
With policies that you personally own, you can list your family or loved ones as beneficiaries. This way, they can get some of the death benefit to help cover expenses after you die. For instance, they can use the money to pay off:
- outstanding debts,
- childcare and
Owning a business is an adventure. You’re helping build a future for yourself and your loved ones while adding jobs and revenue to the economy. Understanding how to navigate the tax system can allow you to further both goals.