Allan Madan is a Mississauga Tax Accountant and a Mississauga Chartered Accountant. Below, Allan shares some very helpful tax and accounting tips for small business owners:
1. Incorporate your small business
The tax rate for Canadian controlled private corporations is only 16.5%, where as the highest tax rate is 46.4% for individuals. Therefore, by incorporating, you will be able to save approximately 30% in taxes.
However, there are additional costs associated with incorporating, including higher legal fees and accounting fees, as compared to a sole proprietorship.
You should speak with your Mississauga Tax Accountant first, before incorporating.
For additional information on incorporating, please see As a Mississauga Tax Accountant, can you help incorporate my small business?
2. Salary to a spouse, says Mississauga Tax Accountant
As a Mississauga Tax Accountant, I often recommend to my clients that they pay their spouse a salary in order to take advantage of income splitting and to reduce taxes. However, the salary paid to your spouse should be reasonable and based on the duties, skill level, and hours worked by your spouse in the business.
3. Keep accurate accounting records
The Canada Revenue Agency requires each small business to maintain an accurate set of accounting records. Otherwise, significant penalties may be assessed.
To satisfy this requirement, I recommend that you purchase an accounting software package such as QuickBooks Pro or Simply Accounting.
While Microsoft Excel can be used to organize your accounting data, it’s prone to manual error and doesn’t provide an audit trail, or even financial statements, both of which are required by the Canada Revenue Agency.
Therefore, as a Mississauga Tax Accountant, I highly recommend that utilize an accounting software package.
4. Criteria for deductible tax expense
Pursuant to the Income Tax Act, an expense is tax-deductible if the expense is incurred for the purpose of earning income from business or property. In addition, the expense must be reasonable.
Therefore, you should keep your receipts for business-related expenses, as they will likely be tax-deductible as long as they meet the criteria indicated above.
You should review your business expenses with your Mississauga Tax Accountant to determine if they are deductible for tax purposes.
5. Car expenses
As a sole proprietor, you can write-off the costs related to your car to the extent that your car is used for business purposes. Car expenses that can be deducted include:
- Maintenance and repairs
- Leases costs (or tax depreciation on purchased vehicles)
- Toll charges
You must keep track of the total KM’s driven in the year and the KM’s driven for business purposes. The tax deductible amount of the car costs is computed as:
Car Costs x Total KM’s Driven for Business / Total KM’s Driven During the Year
However, parking and toll charges are fully tax-deductible and do not need to be prorated based on business KM’s driven.
As a Mississauga Tax Accountant, I am very familiar with the tax rules relating to car expenses.
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.