Legal Ways to Reduce Business Taxes in Canada
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Incorporate Your Small Business:
The first of these legal ways to reduce business taxes in Canada is by incorporating your company. Corporations pay a very low tax rate of only 15.5% on the first half million dollars of profit. Individuals, on the other hand, can pay as high as 46.4% in taxes if their income exceeds $130,000. So, you see, you can save about thirty percent in taxes by simply incorporating your small business.
Add Lower Income Spouse as Shareholder:
The second of the five legal ways to reduce business taxes in Canada is by adding your spouse to your existing corporation as a shareholder. As a shareholder of your company your spouse can receive up to $40,000 in dividends, tax free, per year, from your company, provided that your spouse does not have any other source of income.
Even if your spouse is working and is earning significantly less than you are through your business, it’s still advantageous to pay dividends to your spouse, because you will reduce your family’s overall tax burden. This is because you are in a higher tax bracket and your spouse is in a lower tax bracket.
Write-Off Donations Made to Charities:
The third path on this list of ways to reduce business taxes in Canada by following the law is through donations. Corporations that make donations to registered charities can write-off the entire amount of the donation as an expense as long as the corporation is profitable.
Promote Your Business and Get a Tax Deduction:
The fourth way is to promote your business and get a tax deduction. Advertising expenses are fully deductible; and purchases made for gifts to give to clients are also fully deductible. Finally, meals and entertainment incurred, for example, for wining & dining clients, are fifty percent deductible.
Small Business Deduction:
The fifth of these legitimate methods to save business taxes in Canada involves multiplying the small business deduction. The small business deduction means that the first $500,000 in profits that your corporation earns is subject to a low tax rate of only 15.5%. Profits in excess of half a million dollars are subject to a really high tax rate of about 30%. There is a legitimate way to multiply the small business deduction by two so you can receive a whopping one million dollars small business deduction limit.
The way to do it is as follows. Your spouse will incorporate a company that she owns the shares of one hundred percent. You will also incorporate a company that you own the shares of one hundred percent. As a result, the combined small business deduction limit is one million dollars.