Whether you're an entrepreneur or business owner, there's probably no time of year you dread more than tax season.
Fortunately, SMEs are eligible for a number of tax deductions in Canada and Quebec. Mileage expenses, home office expenses, telecommunication bills, etc. Your expenses and investments may be eligible for tax credits.
Check out our tips for legal tax deductions that will save you money on your next tax return in this article.
Deduct the Maximum Amount of Your Business Expenses from Your Taxable Income
If your business is incorporated, an important point to remember is that your tax rate may vary depending on your income. For example, in 2021, incorporated businesses with employees who worked more than 5,500 hours during the year will be taxed at 13% on the first $500,000 of taxable business income. Business income exceeding this amount will be taxed at a maximum rate of 26.5%.
The goal for a corporation is to attempt to keep taxable business income below $500,000. To do this, it is important to deduct a maximum of eligible expenses.
Here are some tips on how to do this:
Reduce Your Company's Taxes by Counting Your Miles
Did you know that it is possible to make tax deductions related to the use of your business vehicle? This requires you to fill out a mileage log for each of your trips, indicating the date, the place of departure and arrival as well as the number of kilometres travelled.
You should also keep proof of use of your business vehicle, such as gas receipts. These documents will be useful in the case of a tax audit, which is a very common check for this type of expense.
However, commuting from your home to work would not be considered business travel. To keep track of all your business expenses, it's best to hire a corporate tax specialist.
Deduct Your Home Office Expenses
In addition to the Small Business Deduction (SBD), there are many other tax credits that you can take advantage of if you are a manager of a small business.
If as an entrepreneur you run your business from your home office, you should know that you can deduct a number of expenses.
Some of these expenses include home insurance, hydro, part of the rent or mortgage, school and municipal taxes, home maintenance, telephone, internet and entertainment fees.
Considering all the possible deductions, it would be a pity not to take advantage of them! However, take note that the deductions are calculated according to the number of rooms and square feet used for your business activities. Before deducting these expenses to reduce your business taxes, make sure that you meet the eligibility requirements.
Keep Track of Your Meal and Entertainment Expenses
When making expenses for your company, it is important to keep all invoices, as these purchases may be deductible.
For example, meals can be used to reduce your corporate taxes. Obviously, not all of your meals are eligible for this deduction. If they include customer gifts, meal expenses or entertainment expenses (restaurants, food and beverages, cultural and sports events), it is possible to deduct them from your taxes.
To deduct these expenses, keep the invoice and indicate the name of the person(s) you had the meal with on the back as well as the reason for the business meal or entertainment.
Employee-related business tax reductions
Employees often represent a major part of the company's expenses. However, certain laws allow you to reduce your employee-related business taxes.
According to the Canada Revenue Agency (CRA), all reasonable expenses made by your employees can be tax-deductible. However, there are defined categories to keep this in check.
Depending on your activity, you can deduct the cost of equipment used by your employees that are directly and indirectly used in the production of goods and services of your company.
Office expenses are also tax-deductible. It is important that you keep all your invoices proving that you have paid for supplies such as ballpoint pens, pencils, paper clips, stationery, etc.
Finally, if your employees are required to travel as part of their job, you should know that travel expenses can also be deducted from your company's taxes.
As you can see, there are many employee-related tax deductible expenses.
Invest to Reduce Your Business Taxes!
Tax deductions are not just for your company's operating expenses, they can also apply to investments.
In certain sectors designated by a red seal, you can benefit from an investment credit of up to $2,000 if you hire an apprentice. In addition to this deduction, you will benefit from a skilled workforce at a reduced cost.
If your company is in the field of scientific research and development, you could benefit from a tax credit to promote innovation in this area.
A business tax expert can advise you on the SR&ED tax credit and help you determine if you qualify.
Split Your Income
If your family works for your company, income splitting can be beneficial from a tax perspective.
Income splitting involves paying a reasonable salary to an employee who is part of the family. For example, you could pay $10,000 to a relative and he or she would not have to pay any taxes on that amount, while for your company it would be a deductible expense that would reduce your taxable income.
Pay a Dividend, Salary or Bonus to the Shareholder
If your company has any investment income, you may want to pay a dividend to the shareholder. This could result in a refund to the company of up to 38% of the taxable dividend paid.
Another way to save taxes is to pay a salary or bonus to the shareholder, which can be considered an expense and help reduce your company's taxable income.
Make Transactions at the Right Time
If you are planning to make a large transaction (purchasing equipment, selling a building, etc.), you could save a lot of money on your taxes by doing it at the "right time".
With a fiscal year that ends on December 31, making a large purchase at the end of the current year rather than in January of the following year will help you get a tax deduction more quickly.
Alternatively, if you are thinking of selling a capital asset (such as a building), do so in January of the following year, rather than December of the current year, to defer the effect of the sale to the following year.
Take Advantage of the Tax Credits Available in Quebec
There are many possibilities for tax deductions in Quebec. You can deduct mileage expenses as well as stationery expenses, and even meal expenses. The key is to keep your invoices in order to deduct them from your next tax return.
That's why it is very important to use the services of a business tax specialist to manage your taxes. If you need an accountant or a tax specialist for your business, do not hesitate to contact us and we will be glad to help you.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
