Tax strategies for small businesses
What business owners should do from an accounting perspective to plan for the year ahead
Most business owners and entrepreneurs use the beginning of the year to revisit business plans, consider the previous year’s successes or failures, make tweaks and set new goals. But a considerable part of your bottom line can depend on how well your tax strategy is working. If you haven't already, there are some things business owners can and should do from an accounting perspective to plan for the year ahead. Here are five planning tips to help:
1. Consider the impact of NAFTA. With trade talk tensions rising, Canadian business owners can best prepare themselves by creating a scenario analysis on the potential impact of NAFTA reform or potential tarrifs. This can help you see where your business will be affected by any changes, and proactively plan for adjustments that may be required. Will you need a change in sales strategy, or pricing, to generate new revenue? What are areas where you can scale back? Based on the analysis, consider changes you may need to implement across the business, from managing expenses and supplier negotiations to expanding your customer base.
2. Maximize your deductions. As is often the case, it’s the little things that add up. One of the easiest ways to minimize your tax bill is to maximize your deductions. These could include home office expenses – including a portion of your mortgage interest payments, insurance, utilities and repairs – car, meals/entertainment, and depreciation on capital assets. Keep a firm handle on all of your receipts and expenses for all business-related goods and services. Create a specific email folder in your inbox to organize email receipts, or look into using smartphone apps that can capture, store and import paper receipts into accounting software.
3. Remit taxes early to avoid interest. There is a difference between the filing deadline and the date that a business must pay any outstanding balances. In Canada, corporations must file a corporate tax return six months after the corporation’s year-end, but any outstanding tax balances are due two to three months after the corporation’s year-end (depending on the type of corporation). Any balances paid after the due date results in interest charges, so settle your tax liabilities by your deadline to avoid getting dinged with unnecessary charges.
4. Dispose of old equipment. An old rule of thumb is to never dispose of equipment towards the end of the fiscal year as no depreciation can be claimed for the year. However, the beginning of the fiscal year is the best time to dispose of the equipment and if you happen to have a gain, you can defer the tax by one year.
5. Consider making bonus payments direct to RRSP. If you haven't already, consider this strategy next year. Giving bonus payments directly to RRSP plans (if your fiscal year end is in the second half of the calendar year) benefits both your employees and the corporation. As long as a bonus payment is made before March 1 of a given year, employees can choose whether to claim the resulting RRSP deduction in that year, or the previous year’s tax return. In addition, taxes are not withheld since it is paid directly to the institution (CPP/EI holding may be required). The corporation also benefits since the bonus is accrued as an expense for that fiscal year, thereby reducing the corporate net income and saving corporate taxes.
One thing you’ll want to be wary of is distributing salary or dividends to family members. New rules brought into effect by the CRA on January 1, 2018 limits the amount of income that can be distributed to your spouse and kids from your corporation. Due to the complexity of the new rules, speak to a tax professional to help you determine how much is allowed, if any.