As the year draws to a close, small business owners in Canada have a golden opportunity to minimize their tax liability and maximize their financial stability. By implementing smart year-end tax planning strategies for small business, you can ensure you keep more of your hard-earned money while complying with Canadian tax laws. In this article, we will explore important considerations and strategies for Canadian small businesses, highlighting some time-sensitive items and key business deductions to consider.
Review Your Business Structure
One of the first decisions small business owners should revisit at year-end is their business structure. Whether you are a sole proprietor, partnership, corporation, or another entity, your structure can significantly impact your tax liability. For instance, if you’re operating as a corporation, you may be able to take advantage of the small business deduction, which can reduce the federal corporate tax rate on active business income. Similarly, if your business has grown significantly, it might be time to consider incorporating, which can offer tax advantages and limited liability protection.
Evaluate Your Income and Expenses
It’s essential to review your business’s financial performance and make informed decisions about your income and expenses. Delaying or accelerating income or expenses can have a substantial impact on your current-year tax liability. If you expect your income to be lower next year, you may want to defer invoicing clients until the new year. Conversely, if you anticipate higher income next year, you might consider accelerating income into the current year to take advantage of lower tax rates.
There is a near-term opportunity to elect to fully deduct capital asset purchases (with some limitations) in 2023 versus the usual requirement to claim the deduction over several years. For these purchases, the asset must be in use before December 31, 2023, and an election made on filing the tax return. This deadline is extended to December 31, 2024, for sole proprietorships and partnerships of all individuals.
Maximize Small Business Deductions
Canadian small businesses are eligible for various deductions, which can significantly reduce their tax liability. Some key deductions to consider include:
- Small Business Deduction (SBD): This deduction allows eligible small businesses to reduce their federal corporate tax rate on active business income. It’s important to ensure that your business meets the criteria to qualify for the SBD.
- Home Office Expenses: Given the rise in remote work, many small business owners work from home. You can claim a portion of your home-related expenses, such as rent, utilities, and internet, as business expenses if you use your home as your principal place of business.
- Employee Benefits: Offering benefits to employees can be a valuable deduction. This can include health and dental plans, life insurance, and retirement savings plans.
- Scientific Research and Experimental Development (SR&ED) Tax Incentive: If your business is engaged in research and development activities, you may be eligible for the SR&ED program, which offers tax credits for eligible expenditures.
Take Advantage of Time-Sensitive Items
Certain tax planning strategies must be implemented before year-end, so it’s crucial to act promptly. Some time-sensitive considerations include:
- RRSP Contributions: Consider contributing to Registered Retirement Savings Plans (RRSPs) before the end of the year to reduce your personal taxable income.
- Dividend Planning: If your business is incorporated, assess the most tax-efficient way to distribute dividends to yourself and other shareholders.
- Debt Repayment: If your business has outstanding debts, it may be beneficial to pay them off before year-end, potentially reducing interest expenses and improving your financial position.
- Payroll and Bonuses: Ensure you’ve processed payroll and employee bonuses before year-end to claim them as expenses in the current tax year.
The Avisar Difference
Taxes are some of your business’s most significant expenses, which can cause a massive headache when it comes time to file. Remembering all deductions, credits, and strategies is difficult, even for the most well-organized businesses.
Due to the increasing complexity of the tax landscape, working with a professional is always recommended, especially one well-versed in local laws. It can optimize your tax payable throughout the year – freeing you up to focus on what you do best (running your business!)
Avisar CPA specializes in all manners of the tax act and how it applies specifically to BC residents and businesses. We sit down with you to learn more about your situation, business structure, and current goals and position.
After we have analyzed your unique scenario, we will devise a course of action and provide you with actionable steps on how we can improve your overall tax return, year after year. Book a free consultation today to learn more about how we’re helping BC businesses prosper.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.