Tax season is among us and this can be a bittersweet time for many small businesses like your own. Before we get to reap the benefits of our tax returns, there is lots of paperwork to be done which can sometimes be a little confusing. Below are some questions and simple, quick tips to help you along the way.
1) Salary or Dividends?
One of the most common tax questions we get asked is: “how do I pay myself”? This topic could be an article on its own. For simplicity, the key factor is ensuring you take money out of your corporation as tax efficiently as possible. There are only two ways to receive income from your company: salary or dividends. Deciding between these depends on a multitude of factors. When you pay yourself a salary, it is deductible in your corporation. You also increase your RRSP room, pay into CPP, and can deduct childcare expenses against it on your personal tax return. It is also typically easier to secure personal loans when your personal tax return includes T4 income. Within the lower tax brackets, however, paying yourself a dividend is more tax efficient than taking a salary.
2) Do you make over $30,000 in your business? Are you registered for GST?
Registering for GST is an important step for your business. If you exceed the small supplier amount of $30,000 and you have sales that are not zero-rated or GST-exempt, you must register for a GST number and begin charging your clients GST.
3) Income splitting
Having a corporation gives you advantages typical employees don't have. You have the opportunity to income split with family members depending on how you set up the corporation. This can lead to significant tax savings during tax season.
4) What can I deduct?
Most expenses incurred to earn business income are deductible. Meals and entertainment expenses are deductible at a rate of 50%. Vehicle expenses can be calculated using Canada Revenue Agency's 2016 and 2017 prescribed kilometer rates of $0.54 a km for the first 5,000km and $0.48 for every km thereafter. It is important to keep a log of the kilometers driven for business purposes as CRA may ask for evidence. Another common expense is your home office. The home office deduction is calculated based on the square footage of your home office as a percentage of the total square footage of your house. This percentage is then applied to items such as mortgage interest, property taxes, home insurance, utilities, and repairs and maintenance. Typically claiming up to 20% of your home as office space is reasonable, any higher percentage has an increased chance of being denied by CRA.
5) File on time!
Nobody likes to deal with CRA, but make sure you keep up with all your filing dates. You should always file returns on time, whether it is your corporate, GST or personal. Your corporate filing deadline is six months after your yearend, while the payment deadline is three months after yearend. Annual GST filing and payment is due three months after yearend. If you file GST quarterly the deadline for both filing and payment is one month after yearend. The personal tax return filing and payment deadline is April 30 for most individuals. Sole proprietors have the option to file as late as June 15, however, the payment deadline remains April 30.