July 4, 2019
How to Save on Business Taxes
Written by Steven Tulman
Tax season can be a stressful time of the year especially for those who own a business. As an employee to a company, you are solely in charge of filing a T4 that describes your earnings and deductions. In contrast, a business owner is expected to do have a great deal more paperwork prepared going into their tax accountants office. They are even sometimes required to file both a T1 (individual tax return) and T2 (corporate tax return). Although doing your taxes as a business owner can be intimidating, it can be greatly simplified with the right guidance. Our goal today is to help you understand more about how to file your taxes based on the type of business you own and how you can maximize your overall deductions!
The way you file your taxes is entirely dependant on the type of business you are operating. If your business is a partnership or a sole proprietorship, you will need to file a T1 tax form. You are required to declare your business income on your individual tax return form because your business income is an extension of your personal income. The T1 income tax return package contains a T2125 form (Statement of Business or Professional Activities) where you’ll be expected to declare you business income.
If your business is incorporated, you will use the T2 Corporate Income Tax return to report your business income. When you are presiding over a incorporated business, the company is no longer an extension of yourself. Instead, it is legally separate from your personal finances and requires you to complete an independant income tax return. It’s important to remember that as the owner of an incorporated business, you must also fill out a T1 tax form along with your T2 in order to declare your personal income as separate from your business.
Before you get your paperwork in order and start to file your taxes with an accountant, it’s important to know what deductions your business can be eligible for. If you own an incorporated business and are tasked with filling out a T2 Corporate Tax Return Form, the first question you are asked is if your corporation is a Canadian-Controlled Private Corporation (CCPC). CCPC’s tend to have better deduction offerings than other types of Canadian owned businesses. The biggest advantage ascribed to certain CCPC’s is the Small Business Deduction (SBD). SBD’s aim to save the corporation money by deducting the amount they would have to pay for the Part 1 income tax on their T2 Form. Alongside SBD’s, Canadian-Controlled Private Corporations can qualify for additional deductions like investment tax credits, capital gains exemptions when shareholder sell their shares, and research and development tax credits for eligible activities.
Although CCPC’s are the most advantageous corporation to own in Canada if you look purely from a tax deduction perspective, other types of businesses can still qualify for a variety of deductions. All Canadian businesses are allowed to write off expenses related to the cost of doing business:
- Business taxes, memberships, subscriptions
- Interest and fees borrowed for the cost of business
- Insurance business expenses
- Management and administrative charges
- Maintenance and repair charges
- Office supplies and business expenses
- Home business expenses if your home is your primary place of business (utilities/maintenance deductions)
- Travel expenses
- Automobile income tax deductions
- Employing your spouse or child
- Advertising and other expenses
Whether you are the owner of a small proprietorship or a Canadian-Controlled Private Corporation, doing your taxes doesn’t need to be as frustrating as many make it out to be. As long as you have a good accountant by your side, you tax process can effortless. The most advantageous precaution you can take as a business owner is having all of your paperwork and possible deductions organized before going into your accountants office. When you are aware of what you are eligible to write off and what you can’t, you will be able to maximize your deductions and jumpstart your savings!
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