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Small Business Tax Credit and Deductions [Tax Planning 101]

Posted by Alden Hui on March 23, 2018
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For most people (like salaried workers), taxes are due April 30 at 12:00 AM (Midnight).

Canada has some new tax credits that you’ll want to know about. Additionally, they’ve removed and updated some prior tax credits. We’ll also highlight some basic tax principles you should know if you are a small business owner.  

Don’t forget that you can always file taxes online. The CRA promises a faster tax return this way.


Canada Caregiver Credit

You are suitable for this tax credit if you support a spouse, common-law partner, or a dependant with a physical or mental impairment.

This new credit combines 3 previous credits:

  1. The caregiver credit
  2. The family caregiver credit
  3. The credit for infirm dependants age 18 or more

If you claimed any of these credits in previous years, chances are you will be eligible for this combined tax credit.

You can also claim for supporting a few other types of dependants. For more details, read the Canada Caregiver Credit article.

The amount you can claim depends on several factors:

  • Your circumstances
  • The person's (who you are supporting) net income
  • Other overlapping credits

You do not need to send any documents during the claim process, but have documents ready in case you are audited.

Note: This credit only applies to those impaired person whose net income is below $23,046

Children's Fitness and Arts Tax Credit

Last year, the Liberals eliminated this tax credit in favor of a government program called Canada Child Benefit as they believed the former tax credit was benefiting upper class families instead of the intended purpose (for lower class families).

This newly established benefit comes tax-free and dispensed an average of $6000 to eligible families last year.

To see if your child (under 18 years of age) is eligible for this new benefit, read this article.

Health Spending Account (HSA)

You are suitable for an HSA if you are an incorporated small business owner. This also works for incorporated consultants and contractors. Through the HSA plan, you can turn after-tax personal medical expenses into before-tax business deductibles. This means that you can essentially write off the tax on any personal medical costs.

A Health Spending Account is approved by the CRA. It is a legal and effective means to save on medical costs in Canada. To learn more about a Health Spending Account, check out our Top 19 FAQ for a Health Spending Account.

If you are a small business with arm's length employees, the HSA will also work as part of your employee benefits package. In this case, it works differently than above. Under this company structure, it provides 100% tax free reimbursement for your employees (owner included) and makes employee medical expenses (claims) 100% tax deductible for your business. The business owner has complete control over spending limits, classifications, and funding. For more information, check out our Top 24 FAQ for Employee Benefits Package for Small Business.

Disability Tax Credit

No major changes occurred to the tax credit itself, but the government has made it easier to apply for eligibility. They have allowed nurse practitioners to sign off an application. Previously, only certified health professionals (ex. Doctors) could approve an application. If you were eligible in previous years, then you will most likely be again this year, given that nothing changed medically.

Apprenticeship Job Creation Tax Credit

If your business hires tradespeople, consider applying for the apprenticeship job creation tax credit. It has a maximum claimable amount of $2000 per eligible apprentice. The claimable amount is calculated as 10% of the salaries and wages payable to the eligible apprentices.  This credit only applies to those hiring new recruits within the first 2 years of their apprenticeship program. Furthermore, the apprenticeship program must be officially recognized by the Canadian government.

For more info, visit this Canada.ca article.

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.

Balance your dividend / salary mix 

As a small business owner, you are entitled to withdrawing cash from your corporation as either a dividend or salary. Both have their perks and downfalls. Ultimately, it is up the owner to determine what mix will maximize their earnings (based on each owner’s unique circumstances). For example, you may want to pay yourself with enough salary to max out your RRSP. On the other hand, you may want to take out part of your pay as a dividend, to take advantage of a lower tax rate. Not only is your mix determined by current circumstances, but also future predictions. If you expect an economic downturn in the next year, it may not be wise to pay out a large salary. Also consider other sources of income, tax credits, and corporate cash needs.

Know your eligible business expenses

Money spent on your work as a small business owner can be claimed as a tax deduction under reasonable circumstance. If you own a car, keep track of mileage used while working. However, don’t expense the cost of a gas refill every time. Think back to reasonable circumstances. If you are an independent contractor, some popular eligible business deductibles are material and supplies (including equipment), rent, travel, and continuing education. Reasonable is subjective. You’d be surprised to hear that kitchen equipment (used to test new recipes) could be considered a legitimate business expense for a cookbook author.    

Paying salary to your family (Income Splitting)

The key is reasonable conduct. Any salary paid out will count as a business deduction. However, the salary must reasonably match the services provided. Something such as a $500,000 salary for simple administrative services may be seen as unreasonable to many. You should treat family member salary as if they were an “arms-length” employee. Make sure to re-assess your family business’ organizational structure, especially when the new small business tax proposals come into effect.

Budget accordingly & pay taxes early (through a tax plan)

Unlike traditional employees, small business owners may not receive work on a regular or scheduled basis. As a result, you may have financial highs and lows throughout the months.

An experienced entrepreneur recognizes their income patterns and budgets accordingly. If you expect a large tax bill, you can set up a plan to pay incrementally before the deadline of April 30. Interest on owed tax does not apply until after the deadline. By paying in increments early on, you can decrease the amount being charged interest.

Read this article if you want to set up a tax payment plan


It literally pays to be in-the-know when it comes to Canadian small business tax deductions and small business tax credit. Consult with your accountant to make sure that you're making the most of your hard-earned cash. Additionally, the tax structure of your business can profoundly affect your take home pay. 

Leave a comment below if you'd like to see other topics covered within this Canada tax planning guide.

 

One of the best kept tax secrets in Canada is a Health Spending Account (HSA). 

If you own an incorporated business with no arm's length employees, learn more about an HSA by downloading the beginner's guide below:

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If you own a corporation with arm's length employeescheck out this guide instead or click below:

The Beginner's Guide to Health Spending Accounts GROUP HSA Employee Benefits 2018

 

Topics: tax