Tax Loopholes for Small Business Owners in Canada

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.

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.

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