When tax season comes around, Ontario small business owners need to know which tax credits and deductions they are eligible for. In fact, knowing the difference between a credit and a deduction can help small business owners save money every time they pay their taxes.
Tax credits and deductions can help your small business succeed! Let the business accountants at T2inc explain how.
What is the difference between a tax deduction and a tax credit?
A tax deduction is applied to the gross income of a business or individual, resulting in a lower amount on which to calculate taxes owed. It is calculated as a percentage, so the actual amount of money saved will vary.
A tax credit is a sum that is subtracted from the taxes owed, resulting in a lower amount of taxes to be paid. It is applied as a fixed sum that is deducted from the total taxes owed.
What is a tax deduction?
A tax deduction is an amount of money an individual or business is allowed to subtract from their gross income in order to reduce the amount of their taxable income. The advantage of a tax deduction is that it reduces the amount of income subject to tax, hence potentially decreasing the tax liability. However, the actual value of a deduction depends on an individual's marginal tax rate.
The first step in determining your taxable income is to add up all your income and deduct all eligible business expenses. Small business tax deductions are also known as tax write-offs. Deductions are always calculated as percentages based on your variable tax rate, and they must be claimed in the same year the expense was incurred.
Tax deductions are different for different businesses, and the rules surrounding them can be complex and subject to change. To be certain that you are eligible for a specific deduction, consult a professional tax accountant.
What is a tax credit?
A tax credit is a financial benefit that directly reduces the amount of tax owed. It is a form of incentive offered by the provincial or federal government, aimed at encouraging certain behaviors or activities that are deemed beneficial to society or the economy. Unlike a tax deduction, which reduces taxable income, a tax credit directly reduces the amount of tax owed.
When it is time to file your taxes, you should always check which credits are available to your business. Depending on the type of business you run, your activities in the past year, and whether you run a sole proprietorship or corporation, you could be eligible to file for tax credits that will reduce the overall amount you need to pay to the CRA. Tax credits for business are available at the provincial, territorial and federal levels.
Tax credits are sometimes calculated using a percentage to determine the amount of a credit, which is then applied as a dollar value. In some cases, tax credits are refundable.
Types of tax deductions for Ontario small businesses
Ontario small businesses are eligible for a variety of tax deductions. Always remember that deduction rules can change on a yearly basis, and you must consistently keep up to date with current taxation laws in Canada.
A tax deduction is a financial expense that taxpayers are permitted to subtract from their gross income, thereby reducing their taxable income. This expense could be in relation to certain costs incurred during the tax year, such as interest on a mortgage, charitable donations, or educational costs, among others.
Deductions are categorized into standard and itemized deductions, with taxpayers choosing the one most beneficial to them. A standard deduction is a fixed amount, while itemized deductions require detailed records of applicable expenses. To save time and ensure you have easy access to the documents necessary to calculate tax deductions, we recommend relying on professional bookkeeping services.
Tax deductions for freelancers
Freelancers can also deduct some business expenses, including utility bills, professional fees (to accountants and lawyers) and expenses related to a home or vehicle used for their business.
Tax deductions for small businesses
Small businesses that have incorporated their business can benefit from a special deduction on income from Canadian operations, called the Small Business Deduction. Eligible businesses benefit from a reduction of 28% in lieu of 9% on the first $500,000 of business income in that tax year.
Types of tax credits for Ontario small businesses
There are numerous tax credits available to Ontario small businesses, including education credits, energy efficiency credits, and business investment credits.
These credits are typically designed to promote specific policy objectives, such as supporting higher education, incentivizing energy conservation, or stimulating business growth and innovation.
Tax credits are deducted directly from tax money owed. Overall, tax credits serve as powerful tools for both individuals and businesses to reduce their tax burden while simultaneously driving desired social and economic outcomes as determined by the government.
Ontario small business tax credits in 2023
To learn which credits could apply to their business this fiscal year, business owners should refer to the Ontario Ministry of Finance or consult a business tax accountant. Here are three examples of the types of tax credits Ontario small businesses can benefit from in 2023:
Ontario Interactive Digital Media Tax Credit
The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit for eligible corporations in Ontario who have invested in qualifying digital media technologies or have digital games expenditures.
Ontario Regional Opportunities Investment Tax Credit
The Regional Opportunities Investment Tax Credit is a tax deductible available to Ontario corporations who invest or acquire new property during a taxable year.
Ontario Research and Development Tax Credit
If you have a permanent establishment in Ontario and you carried out eligible scientific research and experimental development in Ontario, you may be eligible to claim the Ontario Research and Development Tax Credit.
T2inc can help you find the right tax deductions and tax credits for your business
Tax deductions and tax credits differ in several ways, but the bottom line is that both can help your Ontario small business save money.
Filing taxes is your legal responsibility in Canada. Learning about tax credits and tax deductions requires research, as these benefits can change on a yearly basis depending on a variety of factors.
Contact the tax accountants at T2inc for fast, reliable service! You can also check out our online business tax software to save even more time and money.
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.
