Small Business Deductions in Canada Watch Video
Allan Madan, CPA, CA
Interested in how the small business deduction in Canada can save you money through a special tax rate? Read More…
Disclaimer
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.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
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.
Recently, I converted my profitable business from a partnership to a CCPC. Are there any other benefits I can now enjoy besides the SBD? Are there any ways I can minimize my personal taxes?
Hello and thank you for your question.
Besides the small business deduction that I spoke about in the article above, you can also take advantage of the Capital Gains Exemption. This an allowance for the first $750,000 of Capital Gains to be received without being taxed as regular income tax. This, in turn, encourages people to buy shares of your company.
If you do not want to pay any personal tax, try to minimize the amount of funds you are taking out of the corporation. If you are taking more funds out than is need to run the business, you may be jeopardizing your ability to claim the exemption. For shares to qualify for the exemption, the corporation must have at least 90% of the market value of its assets invested to earn business income.
Hi Allan, if I invest excess funds made by my corporation, will the investment income earned be taxed at the full rate or the small business deduction rate?
Hello. If you invest the excess funds made by your corporation, any income earned will be taxed at the full corporate tax rate. This tax rate may be higher than the personal marginal tax rates of the shareholders. If so, you will want to increase shareholder income. This will prevent the lower tax bracket of these shareholders from being “wasted”. A shareholder’s income can be increased if the corporation pays them more dividends.
No tax savings from the small business deduction applies because investment income is not considered to be “earned” from operating a business. Only “active business income” applies for the deduction.
Regards, Allan Madan and Team
I have a business that has been gaining substantial profit as the years increase. It is nearing the $500,000 mark in terms of yearly profits, and it is projected to surpass that within the next tax year. It will not be much more than $500,000 within the next tax year, so I would still be considered a small business. Are there any other ways aside from claiming a bonus to myself that I can offset some of the profits so that the business’ final profit is below $500,000?
Aside from bonus, you could consider:
· Purchasing capital equipments which will provide you with CCA (tax depreciation) expense
· Accruing your accountant’s fee for the preparation of financial statements and tax return for that year
· If your business’s year end is December 31, you can consider making your January expenses in December. For example, supplies or travel expenses you’ll incur in January, you can consider making in December.
Hello Allan,
My company is a CCPC. What is the maximum allowable business limit if my company is associated with other corporations? We have more than $10 million in taxable capital employed in Canada. Also, how do I calculate the rate if my corporation tax year spans multiple years?
Daniel,
Since your corporation is associated with others, you need to file the Schedule 23. Then, you assign a percentage of the business limit to each corporation. Since your corporation has more than $10 million of taxable capital employed in Canada, your corporation may have a reduced limit. If your corporation’s tax year covers months in two different calendar years, the rate is prorated based on the number of days in each calendar year.
Regards,
Allan Madan and Team
My husband and I have two small businesses but we each own one business so that we can cash in on the small business deduction. We are looking to start an additional small business but are unsure whether we should have co-ownership or if one of us should fully own it. What is the best route to take if one of us did not surpass the $500,000 deduction limit but the other one did?
If the new business was split between the two of you then the $500,000 deduction limit would also be split between the two of you. As such, it wouldn’t do you much good to have co-ownership of the business. The person who has not surpassed the $500,000 deduction limit should take full ownership. Keep in mind that if one person has two or more CCPCs associated with one another in a taxation year, the small business deduction must be shared between the two.
Hello, this will be the first tax year where my small company is a Canada-Controlled private corporation. I am still a little confused about how I can take advantage of the Small Business Deduction. Where and how do I file for it on my next tax return?
Hi, basically the Small Business Deduction (SBD) reduces Part 1 tax that your corporation would normally pay for. The SBD rate is 17%. The SBD is calculated by multiplying the 17% SBD rate by the smallest amount in the categories listed below:
• Line 400 – the income from active business carried on in Canada. Generally, income from specified investment business or personal service business are not considered active business and will not be eligible for the SBD.
• Line 405 – Taxable income for the SBD.
• Line 410 – Business Limit. On this line, you must enter the business limit for the year, which cannot exceed $500,000 and cannot be associated with any other corporation.
• Line 425 – Reduced business deduction. Please note that CCPC’s that have taxable employed in Canada that exceeds $15 million or more do not qualify for the SBD.
Once you multiply the least amount of the above categories with the SBD rate and enter it on Line 430. You also must put that number on Line 1 of page 7 of the return.
Hi, I am thinking of incorporating my business so I can take advantage of the small business deduction. I was wondering what the disadvantages of incorporating a business too soon so I can make a decision whether to incorporate my business now or wait until it grows larger.
Hi Julian, the first disadvantage is that incorporating a business is the most complicated business structure. It is very important to plan who your shareholders are and how your shares will be divided. The second disadvantage is that you cannot right off business losses against other income of the shareholders. The third disadvantage is there is more administrative work for incorporated business. This includes annual reports filed with the corporate registry along with corporate tax returns, which are separate from personal tax returns. The fourth disadvantage is that it is very costly to incorporate a business.
Consider your options carefully when trying to incorporate your business and always contact your lawyer and accountant to avoid serious setbacks.
I just realized I forgot to pay the CPP and EI for my business! I am only a day late though, so is it possible to file them today and not face any penalties?
Hi Rex, unfortunately you will have to pay a penalty, but it’s not as big as it used to be. Prior to July 2003, failure to pay CPP and EI for you employees resulted in a 10% penalty of the amount not remitted for each occurrence.
After June 2003, there was a new system that the government introduced for assessing penalties for late payments of employee deductions. If you are late by three days or less, a penalty of 3% will apply. If you are four or five days late, the penalty will be 5%. Six or seven days late will result in a 7% penalty. The penalty will reach 10% when you get past the eight-day mark.
It may be obvious, but even though the penalty is a lot small than it was before, you should always remit your employee deductions on time to save you the most money.
Hi, I own and operate a very small unincorporated business. Am I allowed to deduct health and dental premiums for myself as a business expense?
Hello Darrell, yes you are allowed to deduct health and dental premiums for yourself as a business expense on form T2125. However, you need to follow a few rules before you can be considered for the deductions. The first restriction is that you need to be actively involved in the business. The business also has to be your primary source of income in the current year, or income from other sources does not exceed $10,000.
Another restriction for deducting health and dental premiums is that you need to offer equivalent coverage to all permanent full-time employees, who are not blood related to you. Please note that the maximum deduction allowed is $1,500 for each of you and your spouse and $750 for each child.
Lastly, you will not be eligible to claim a medical expense tax credit if you deduct the premiums paid as a business expense. Although the rules can be complicated to understand, the benefits can be significant. If you need any more information, contact me directly and I can help you plan out how to set up your health and dental premiums.
Allan and his team
Hello, I entertained some clients at a golf course today. I know I am not allowed to deduct the round of golf, but am I allowed to deduct the meal we had after our round at the course?
Hi Bryon, normally you would be able to deduct 50% off the meal, even if you went to a golf course for the meal. Unfortunately, since you did play golf and eat at the club on the same day, you will not be able to deduct any of the costs you paid during the day.
Hi Allan, I own a Canadian-controlled private corporation. Last year my profits were around $300,000, so I was able to only pay 15% for the income tax rate. This year, it seems like my profits will exceed $500,000. Will I have to pay the 28% income tax rate on the full profits since I am making over the limit that allowed me to pay only 15%?
Hello Cody, you will not have to pay the 28% income tax rate on your full profits. You will, however, will have to pay it on some of your profits. Let’s say that you make $700,000 in the year. You will pay the 15% income tax rate on the first $500,000, then you will pay the 28% income tax rate on the remaining $200,000.
Hi Allan, I have been notified that I qualify for the “Quick Method” of accounting. The problem is, I have no idea what this means. Something called Quick Method sounds too good to be true. Will I be hit with hidden tax? Or is this actually a good way to do my accounting?
Hello, the Quick Method of accounting is actually a great way to do your accounting as it is a simple way to calculate and remit GST. It can also reduce the tax you pay on your return. When you implement the Quick Method, all you need to do is collect the GST on your taxable sales and then remit to the government 1.8% or 3.6% (the 3.6% is for service business while the 1.8% is for retailers and wholesalers) of the total sales including GST. With this method, you do not calculate or obtain input tax credits on normal business expenses. These input tax credits are replaced with the portion of the 5% sales tax not remitted to the GST office.
Keep in mind the 1% reduction in both rates on your first $30,000 of sales. They offer an incentive to use this method; for the first $30,000 of sales the rates are only 2.6% and 0.8%. Once your sales, including GST, go over the $30,000 mark, you must start remitting based on 3.6% or 1.8% as appropriate in your case.
I am looking for information on how to apply my business’s after-tax/dividend distribution to my books.
Hi Tyler,
Dividends paid are classified as an ‘equity account’ and reduce retained earnings. On your books, setup a Cash Dividends account in the equity section of the balance sheet. The debit will be posted to the Cash Dividends Account and the credit will be posted to the Cash (bank) account.
Thanks,
Allan Madan
Hi, this is my first year owning an incorporated business. The last few years, the business was not incorporated and fairly small, so I did the taxes by myself with tax software. Now that the business is incorporated and a lot bigger than it was, will I still be able to use the tax software to maximize the deductions I can claim, or would it be a better investment to hire an accountant to help me out?
Hello Jakub, it really depends on how big and complex your business is. In your case, it seems that you may want to start looking for professional help. This will end up helping you in the long run, because a professional accountant will be able to find more deductions for your business. You might get overwhelmed trying to both do your taxes and run your business at the same time, and it might end up costing you some mistakes in your business, your tax return, or both.
Hi Allan, I have a full time job and earn $62k/year. I’m presently accumulating shares of a mining company and have unfortunately maximized my TFSA room. I wish to continue expanding my portfolio however I’m concerned about the tax liabilities if I trade under a cash (non registered) account since the capital gain will be considered as earned income. I wish to explore the corporation route and trade stocks under a corporation to minimize the tax burden and eventually pay myself dividend as I understand the tax liabilities are minimal for the first $40k/year.
?Hi Chris,
It was nice speaking with you today. Capital gains inside a corporation will be taxed at the highest marginal rate. This is to discourage investors from incorporating in order to obtain the small business tax rate on investment income.
Hi Allan,
Thanks for your time and expertise,much appreciated! My long term goal is to purchase income producing properties and eventually launch my real estate investment company. I understand there is a way to defer capital gain by reinvesting the proceeds. Can I purchase stocks under a non-registered account and defer capital gain provided I reinvest it by purchasing an investment property? Should I incorporate now and trade under my corporation to achieve this?
Thanks again Allan
?Unfortunately, tax deferral is not available. If you are flipping properties for profit, then buying inside a corporation makes sense in order to pay the low corporate tax rate of 15.5% on business income. However, rental income earned inside a corporation is taxed at approximately 48% in the province of Ontario.
I have a holding company which borrowed money from a third party and the holding company owns my operating company. The holding company then loaned the money it received to the operating company. Can the interest be deducted?
Firstly, a loan agreement should be drafted between the holding company and operating company. It’s recommended that the holding company charge a higher rate of interest to the operating company than its paying to the third party. The interest paid by both the holding company and operating company is tax deductible, providing that a contract exists to substantiate the terms of the loan and providing that the loan proceeds were used to generate income from a business.
Hi Allan, I just got out of college and will be self-employed for the first time. I read somewhere that my tax return would be due on June 15th every year. Will I still have to file one on April 30th?
Hello Jonas, if you are self-employed during the year, your tax filing deadline is June 15th, however, any income taxes owing must be paid by April 30th. For the current tax year, the CRA will send you a reminder by mail if you have to pay tax by installments. This will usually happen if your net tax owing is more than $3,000 in the current year and in either of the two previous years. You will have to pay your installments quarterly. The due dates are March 15, June 15, September 15 and December 15. You will have to pay interest on any unpaid installments. The CRA charges interest compounded daily at the prescribed interest rate. The rate can change every 3 months.
There are three options that you can choose from for your payments.
1) Non-calculation option – Use this option if your income, deductions and credits stay about the same from year to year. Pay the amount noted on your installment reminder
2) Prior-year option – Use this if your current income, deductions and credits will be similar to the prior year, but different from other years. If you make installments on time throughout the year but have to pay more when you file your tax return, you will not be charged interest.
3) Current-year option – Use this if your current income, deductions and credits will be largely different from other years. If your installments turn out to be too low, you will have to pay interest.
I own both a business and a corporation, should i combine the two into one business or keep them seperate. I am a employee/contractor in which all my income goes into the corporatiion account, but have a new start up business (not a corp) that I recently started with numberous start up costs?
Hi Tessa,
Thanks for contacting me.
The benefit of combining the two businesses into one corporation, is that you can offset the losses from one business against the profits of the other. This will reduce the taxable income of the corporation?. Since your startup business is incurring losses right now, you will see an immediate tax benefit by combining both business into one corporation.
The benefit of keeping the two businesses in separate corporations is that you can potentially claim the capital gains exemption when you eventually sell one, or both businesses in the future. The capital gains exemption ‘exempts’ the first $800,000 of gain on sale of private company shares in Canada from taxation. The other benefit of having 2 separate corporations is that you can minimize business risk. For example, if the startup business were to run into legal problems, it would not affect your other contracting business.
Thanks,
Allan Madan, CPA, CA
Hello Allan, it has come to my attention that I am eligible to claim an Investment Tax Credit. Can you explain how I can claim the credit? I don’t want to miss out on anything and get full use of my credit!
Hi Nidalee, if you are eligible to claim an investment tax credit for a purchase other than for scientific research and experimental development. All you will need to do is complete Form T2038 and submit it with your completed tax return. With this form you will be able to calculate the amount of tax credit available by multiplying the cost of the purchase by the investment tax credit rate. You may then deduct this investment tax credit from taxes you would otherwise have to pay.
If after deducting the investment tax credit from your tax liability, there is still a balance left over, you may apply to have up to 40% of the balance refunded in the current year. Most investment tax credit programs offer this refundable feature. If there is a balance left over, the balance can be carried back three years to reduce tax liabilities, or forward twenty years. This system should provide ample opportunity to make use of the investment tax credits. As a planning point, if it appears that investment tax credits may start to be lost, you should consider reducing discretionary expenses like not claiming CCA or not providing for receivables.
hi, if I am a full-time salaried employee and I have a freelance work – can i open a proprietary company and show expenses in that and reduce tax on my salaried income?
Hi Will,
If the expenses you incur as a self employed person exceed the revenues that you earned, then you will have a business loss. Business losses can be offset against employment income. However, if you continue to post business losses each year, the CRA will likely question the validity of the business expenses you claimed.
Thanks,
Allan Madan, CPA, CA
Hi Allan, I own a small business that my retired father wants to join. I want to support him financially now that he is retired, but I was thinking of just providing him with the money. Would it make a difference, in a tax sense, between giving him a job and just giving him money?
Hello Craig, it will be more beneficial for you to pay your father a salary out of your business as opposed to just giving them the money. This can reduce income taxes by providing you with a tax deduction at your higher income tax rate and having it taxed in the hands of your father at a lower rate. By maximizing the lower tax rates in your family as a whole, you will pay less tax overall. Remember that a salary must be reasonable for the work performed.
Hi Allan, I am a first year small business owner. Looking at my numbers briefly it appears that I will lose money. How do I truly calculate my losses and are they tax deductible?
Hi Shawn, if your business lost money in the current year, you may be able to deduct this from income you have gained in other tax years. But you must calculate your eligible losses first. The first step is to calculate your business loss and enter it on your tax return. Then add in all of your other sources of income. From this, subtract you eligible deductions from the income.
If the taxable income on your tax return is negative, you will have a loss that can be used to reduce taxes you have paid or will pay.
Keep in mind that just because your business lost money, it doesn’t mean you have a loss which you can carry forward or carry back. You must first deduct your business loss from all other sources of income in the current year.
Hello Alan,
I run a small business. If I want to pay myself a lumpsump salary at the end of the year, how can I do this. I am the primary shareholder (100%), so will I be exempted from paying EI.
Hi Shawn,
Your company will need to register for a payroll account first. You can pay a lump-sum salary (also known as a bonus) at the end of the year. You must deduct CPP premiums and taxes from the bonus paid to you. These source deductions must be remitted to the CRA by the 15th of the following month. You are exempt from paying EI premiums.
Please use the CRA’s payroll tax calculator to determine the taxes to deduct from the bonus, and the amount of source deductions to remit to the CRA. http://www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/pdoc-eng.html