Running a business in Canada gives you a whole new world of potential tax deductions that you can use to reduce the amount of income tax you have to pay at the end of the tax year or even, perhaps, to get a tax refund.
But are you truly getting to benefit from all the tax deductions you could be writing off against your business income? Here are seven income tax deductions that many Canadian small business owners overlook.
1. Home Business Tax Deductions
Many Canadian small business owners are aware of being able to claim home-based business expenses, but a significant number do not seem to be aware of the extent of tax deductions they can claim. These range from the interest on your mortgage to a portion of the cost of cleaning materials. Speak to your accountant to ensure that you aren't missing out on claiming everyday expenses that can lower your tax bill.
2. Scientific Research and Experimental Development Tax Credits
Some Canadian small businesses don't realize that you don't have to be a big business or even an incorporated business to claim tax credits for scientific research and experimental development (SR&ED). The great thing about the SR&ED tax credit program is that the tax credit is refundable, so even if your business doesn't make any profit, you will receive the refund back in cash.
3. Allowable Reserves as an Income Tax Deduction
You can deduct an amount for a reserve, contingent account, or a sinking fund as long as the Income Tax Act allows it and the amount is reasonable. Generally, the amount you place in reserve has to be returned to your income the following year, although you could start/claim a new reserve that year. Canada Revenue Agency's Business and Professional Income Guide lists several CRA publications where you can read more about creating and using allowable reserves, including Interpretation Bulletin IT-154R, Special Reserves.
4. Investment Tax Credits
Are you aware that there are Investment Tax Credits (ITCs) for Canadian businesses that will let you subtract the cost of some types of property your small business acquired or some of the expenditures your small business incurred right off the top of the taxes you owe?
There are eligibility rules and some of the ITCs available only apply to businesses located in particular places, but if your business qualifies, they can be a real tax break. More detail about investment tax credits can be found here.
5. Hiring Your Spouse or Child Will Give You a Tax Deduction
Whenever you hire someone, the cost of the employee's wages is a business expense. The same is true even when your new employee is your spouse or child. The difference is that hiring your own spouse or child also gives you the chance to do some income splitting. By employing your spouse or child in your business, you may be able to drop your net income into a lower tax bracket, netting a nice income tax deduction.
6. Apprenticeship Job Creation Tax Credit
If your business hires tradespeople, you can get an Investment Tax Credit of up to $2,000 for hiring an apprentice who is working in the first two years of his or her apprenticeship program.
You can take on an apprentice as a sole proprietor, too. The Apprenticeship Job Creation Tax Credit is a great way to get some skilled help working for you at a reduced rate.
7. Investment Tax Credit for Child Care Spaces
If you don't operate a child care services business, your business can claim a non-refundable investment tax credit of $10,000 per child care space or 25% of the eligible expenditure for every new child care space your business creates in a licensed child care facility your business operates for the benefit of the children of your employees.
It literally pays to be in-the-know when it comes to realizing available Canadian small business tax deductions. Always consult with your accountant to make sure that you're making the most of your hard-earned cash.
Related Reading: Tax Planning to Help you Protect your Hard-Earned Goodwill
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