Every serious entrepreneur understands that cash is the bloodline of their business. While they look at all areas of operation for ways to cut costs and protect their cash flow, they should be aware that smart tax planning can greatly assist their business. Below, I have explained unique tax ideas that you, as a small business owner and entrepreneur, can consider to protect your cash from the taxman.
1. Reduce tax installments
Are the monthly corporate tax installments you’ve been making too burdensome for your company’s cash position? If yes, there are several ways that you can reduce the amount or frequency of the installments starting with the next fiscal year.
First, it is possible to reduce the frequency of the installment payments from monthly to quarterly (every 3 months). In order to qualify, your business must qualify for the small business deduction (ie. Be a Canadian Controlled Private Corporation), have a taxable income of less than $500,000 and meet certain other criteria. You should consult your accountant to determine if your business qualifies.
Second, if you expect that in the new fiscal year, your business’ income will be considerably less than the income of the previous year (eg. you lost a major client), you can base your installment payments on the estimated net income of the new fiscal year. However, you should proceed with caution as if the CRA determines that you have been too conservative with the net income estimation and the installment payments are unreasonable, they may apply interest.
2. Utilize your company’s line of credit
When it’s time to pay the company tax (whether it’d be income tax, GST/HST, payroll, or other taxes) and you do not have sufficient cash inside the company, consider borrowing from your company’s line of credit to pay off the tax. The reason is that the CRA charges 6% (as of December 2013) interest compounded daily on any unpaid amount of tax. In contrast, the line of credit offers a more reasonable interest rate on amounts borrowed, saving you a few interest points. Furthermore, the interest paid on the line of credit is deductible as business expense while interest paid to the CRA is not. This unique tax savings idea is bound to save you money.
3. Store your excess cash in a savings account
This unique tax idea for small businesses is about putting your excess cash to work for you.
If you find that your company has more than sufficient cash for day to day operations, or if you are setting a portion of your cash balance aside for your next major purchase, consider opening up a business savings account to deposit the excess cash. By doing so, your cash will generate interest income.
4. Consider registering to collect GST/HST voluntarily
By law, a business is not required to register and collect GST/HST until their annual qualifying sales exceed $30,000. However, even if your business’ sales do not exceed $30,000, it may be advantageous to register for the GST/HST account. The reason is that by registering, you will be able to recover any GST/HST you’ve paid on your business expenses. This means that effectively, you won’t have to worry about the cost of sales tax when making purchases related to your business.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.