Tax Loopholes for Small Business Owners in Canada

Allan Madan, CA
 May 30, 2012
Share
15 Comments
Share

This article will take you through the tax loopholes for small business owners in Canada, and by the end of this article you should know enough about tax loopholes to save you a fair amount of money.

There are five main tax loopholes that we will discuss here, so if you are a Canadian small business owner it’s really important that you go through these tax loopholes for small business owners in Canada and save yourself a tonne in taxes.

Tax Loophole #1:

The number one loophole is tax deferral. The corporate income tax rate is 15.5% (that is the combined provincial and federal rate). However, your personal rate can reach as high as 46.4%. That’s a difference of almost 31 percentage points. Having said that, it makes a lot of sense to keep most of the money inside your corporation, pay a low rate of tax, and take out only what you need from the corporation to pay for your living expenses.

This way, you’re taking advantage of the low corporate tax rate and not paying much in the form of personal income taxes.

#2 – Charging Rent:

The second loophole that we’ll discuss here is charging rent to your corporation. If you work from home and use your home-office for work, you can charge rent related to your home-office to your corporation. What are the expenses that make up rent? Well, these include mortgage interest, property taxes, utilities like gas, water, & hydro, home insurance, and general repairs and maintenance.

You wouldn’t charge back all these running costs of your home to your corporation as rent but you’d only charge back a portion. The percentage that you can charge back is determined by a formula, and that formula is the size of your home office relative to the size of your total home. For example, if your home-office is 200 square feet, and your home is 2000 square feet, it would mean you’d be able to deduct 10% of your home’s running costs, and that’s what you charge-back as rent to your corporation.

#3 – Buying a Home:

The third tax loophole is buying a home using your company’s money. If you borrow money from your corporation, the loan will be included in your income in the year that you take out the loan, and that is not a good strategy. But, there is a way to get money held up inside your corporation out of tax reach to buy a home.

There’s an exception which basically says that an employee of the corporation can borrow money from the corporation for the purpose of acquiring a home that he/she is going to live in. So, if you are looking at buying that $500,000 dream house, there’s a way to get $100,000 or more from your corporation (completely tax free) to buy that dream home.

#4 – Year End Shopping:

The fourth major tax loophole is to make major purchases towards the end of the year. So, if you have to buy office equipment, computers, other manufacturing equipment, furniture, etc, it’s best to make those main purchases around December, and the reason is that you’d get a full year’s worth of depreciation, only though you’ve held the assets for a few days or a few weeks. It’s a great tax saving idea.

#5 – Keep your HST:

The fifth tax loophole is that you keep the HST that you collected. Most small business owners don’t know the about the quick method of accounting for HST, but this method allows you the keep the lion’s share of the HST you collect. Here’s how it works. You charge 13% to your clients or customers for the good and services that you provide, but you only remit 8.8% of your total sales to the Canada Revenue Agency. That means you get to keep the difference between 13% and 8.8%.

For those small business owners who don’t have a lot of HST paid on purchases, the quick method is the way to go.





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.

Related Resources

Leave Your Comment Here:
Required fields are marked.

Your email address will not be published. Required fields are marked *

11 − 10 =

Comments 15

  1. Hi,

    I found your tips very informative and useful. I live in Victoria BC and have an apartment building also in Victoria. I have an office in my home for looking after the business end. I realize a proportionate amount of expenses can be taken off of my residential home as rent for my business. Can I not also charge my company rent for having an office in my home?

    Raj

    1. Hi Raj,

      You only claim one of the following: work from home expense on your personal return; or rent expense for the same amount on your business. You cannot double-dip.

      – Allan and his team

  2. Hi again,

    Thank you for answering my question. So, I can’t charge my corporation rent for the office in my home, but proportionate rent expenses? I can’t randomly say, I will charge my corportation $500/ month just to rent a room in my home?

    Raj

    1. Hi Raj,

      The best option is to charge your corporation rent for amount of home-office expenses incurred for business. Charging a flat rent of $500/month may not be accepted by the CRA in the event of an audit. The rent expense can be deducted as business expense.

      However, the rent charged to your corporation will have to be reported on your personal tax return as rental income.

      -Allan and his team

  3. So I charge 1200.00 for the year for rent. Co. has an expense.

    Do I not have to claim that 1200.00 as income on my personal tax return?

    The tax man just throws that away? What about 500 a month or 6,000 a year. No one pays tax on that?

    Thanks,
    Dave

    1. Hi Dave,

      All income has to be reported on the tax return. Hence, you must report the $1200 of rental income and deduct any related expenses such as property taxes, mortgage interest, etc in order to lower taxes.

      Please contact us if have any further questions.

      Regards,

      Allan and his team

    2. Hi Dave,
      You are correct. You are required to report all income on your personal tax return, and hence, you would have to report the rental amount earned.

      -Allan and his Team

  4. Hi Dave,

    A quick question. My family member is planning to buy a Subway Franchise. I plan on getting a line of credit for them because they can’t get one. They will be paying me the interest the bank charges me. Will I have to report that interest as income? Is there a way to offset it? Thank you in advance.

    Raj

    1. Hi Raj,

      You may be required to report the interest income. We’ll really need to look at the issue in greater detail to give you a precise answer.

      However, if you are required to report the interest income, you’ll have an equal interest expense to the bank. As such, your net income will be $0.

      Please don’t hesitate to contact me should you have more questions.

      – Allan
      (905) 268-0150

    1. Hi Sam,

      Thanks for the question. While your corporation collects 13% from its customers, under the Quick Method of Accounting for HST, your corporation only has to remit HST to the Canada Revenue Agency as follows: 8.8% x Sales for Year x 1.13. For example, if your corporation’s sales (before HST) were $100,000 in 2013, then your corporation is required to remit $9,944 of the $13,000 of HST collected (i.e. 8.8% x 100,000 x 1.13). Your corporation can keep the difference of $3,056 (i.e. $13,000 less $9,944).

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  5. Hi Allan,
    Is quick method applicable to all small business or just service oriented ones? Because this quick method can eliminate lots of work for a sole proprietor or Incorporation. If One is using quick method can he still claim anything else from his company in the year end or on quarterly HST return?

    1. Hi Ravi,

      The answer to your question depends on the nature of your business. The quick method is applicable to your business if you meet all of the following requirements:

      1. You have been in business throughout the year (365 days) ending immediately before your current reporting period;

      2. You did not repeal an election for the quick method or the simplified method for claiming ITCs during the 365 day period;

      3. You are not listed under the CRA’s list of “Exceptions” who cannot use the quick method (e.g. you are not a person who provides legal, accounting or actuarial services).

      4. Lastly, your revenues from annual worldwide sales are not more than $400,000 for the last four fiscal quarters out of your last five fiscal quarters.

      As long as your business meets these requirements it may elect to use the quick method. As for making other claims, while electing under the quick method you may still claim input tax credits (ITC) for GST/HST paid on capital items purchased. However, you may not claim ITC’s for your regular operating expenses.

  6. Thanks so much for this info 🙂 Are there any loopholes for late election? I started my business a year ago but didn’t realize I had to elect for the quick method by the second fiscal quarter :(

Pin It on Pinterest

Share This