Taxes are complicated and daunting on a good day, with many complexities and potential pitfalls. Not all is negative, though, as there also are a number of legal small business tax loopholes you can use to your advantage and save money.
This blog will examine 5 legal tax loopholes in Canada, all official and legitimate, to minimize your declared income and maximize your tax refund.
Taxes and Investments
Regarding taxable income, the Canadian government does not treat all investments and earnings the same way. Some are eligible for tax credits or other favourable tax treatment.
Stocks and other assets fall into this category for dividends and capital gains. Certain dividends from taxable Canadian corporations may be claimed, while some capital gains are also eligible for deductions, such as the sale of company shares or qualified property.
Especially if you have international investments, you must declare any capital gains and dividends from investments. You can save some money by putting it into tax-protected portfolios.
We recommend consulting with an experienced tax accountant to determine which selections are most favourable to your business, as the time to acquire and sell particular investments can significantly affect your stated annual income.
Sometimes, the margins between having too much or too little capital in any single investment can make a big difference in tax refunds.
Hire a Family Member
One often overlooked tax loophole is the advantage of hiring family members. It does not matter if you are a one-person business or have several employees; hiring your spouse or child can bring you considerable tax savings.
You might be familiar with the “basic personal amount” of your spouse or child that is tax-free. This minimum personal allowance is also tax-free for your company and qualifies as a tax deduction for your company.
This also has advantages for your family member who might be able to claim non-refundable tax credits, such as tuition or donation credits, so this loophole benefits both sides.
So, don’t view hiring a family member as nepotism but as a viable opportunity for tax savings.
Maximize Non-Capital Losses
If your business is experiencing a non-capital loss in any year, you can use this loss to offset other personal income. A non-capital loss includes any unused losses from office, employment, business or property and unused allowable business investment losses (ABIL). So, if your expenses exceed your business income, you may be able to apply this loss.
Any non-capital losses incurred after 2005 can be carried back by or to any or all of the previous three years or carried forward by 7, 10 or 20 years to offset all or part of the taxable income from any of these years.
When you file your tax return, you can request a carry-back with a T1A Request for Loss Carry Back. It is important to note that any unused allowable business investment losses can only be carried forward 10 years.
Any non-capital losses unused after their carry-forward period expire and are lost. On the other hand, any unused ABIL after the carry-forward period turns into a net capital loss, which can be carried forward indefinitely to be offset against capital gains.
Increase Your Charitable Income Tax Discounts
The government incentivizes businesses to donate to registered charities, whether they are public or private. If you donate, you are entitled to a tax deduction against your income, and by reducing taxable income, you reduce your business’s tax liability. You don’t have to claim the whole donation amount in one particular year, but donations can be carried forward for up to five years. Generally, a business can claim a deduction for charitable contributions up to 75% of the business’s net income for the year.
To increase the tax-free amount of your donations, you can opt to donate eligible securities to the registered charity instead of cash. This eliminates the capital gain on the securities and helps maximize your tax deductions.
Look For Home Business Deductions
Do you run your business out of your home? If so, you have several tax advantages available.
The CRA allows for expenses for the business use of a workspace in your home as long as you meet one of the following two conditions:
- It is your principal place of business
- You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients
You can deduct part of regular maintenance costs, such as heating, home insurance, electricity or cleaning materials. You can also deduct part of your property taxes, mortgage interest and capital cost allowance (CCA).
To calculate the part you can deduct, you must use a reasonable basis, such as how much of the total area of your home you use as your workspace. If you use part of your home for business and personal living, you must calculate how many hours in the day you use the rooms for your business and divide that amount by 24 hours.
To determine how much of your household cost you can deduct, you then multiply the result by the business part of your total home expenses.
It is important to note that the amount you can deduct for business-use-of-home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use these expenses to increase or create a business loss.
Need Tax Advice?
If you need advice on taxes and income tax loopholes in Canada, you need an experienced accounting firm to ensure you navigate the complexities of the Canadian tax system with confidence and not only rest assured that your accounting will be professional and up-to-date but also maximize all tax deductions and benefits.
Stratos Accounting & Consulting is your professional choice for dedicated, personalized, customized services. We strive to provide our clients with exceptional customer service and always be available to answer questions and provide guidance. Our team of experienced professionals works closely with our clients to understand their unique needs and objectives and develop solutions tailored to their specific situations.
Our company is built upon five pillars: Integrity, Professionalism, Respect, Quality and Transparency.
Contact Stratos Accounting & Consulting today at 416-477-4775 or fill out our convenient online form to learn more about how Stratos can help your business soar.