Simple Tax Considerations for Small Business Owners

Whether you are preparing for small business ownership or have owned a business for some time, tax planning is a major component of managing a business.

The Canadian Federation of Independent Business reports that the total tax burden is the top concern of small and medium-sized businesses. This is especially important as income taxes can have a significant impact on your cash flow. The following is a list of simple tax considerations, however, I strongly encourage small business owners to seek professional advice in order to prepare tax returns and investigate methods to minimize tax liabilities.

• Separate your business/personal expenses: This one seems simple, but can be a difficult task to leave to your bookkeeper/accountant. My advice is to use a small business credit card solely for business purposes and maintain your own ledger to save on accounting fees and tax payable. Using a line of credit specifically for small business purposes will also help keep your business and personal finances separate.

  Don’t surprise your accountant with a box full of personal/business receipts to sift through!

• Take advantage of income splitting: Hiring a family member is a great way to reduce your tax liability by redistributing your income to your spouse or child. In doing this, you are effectively lowering your level of income, thereby qualifying yourself for a lower marginal tax rate.

  Overall you can minimize your family taxes and claim additional personal exemptions. I recommend you consult a professional to manage tax documentation as certain rules have to be met to qualify for this consideration.

• Be familiar with expenses that are tax deductible: And this means keeping proper records and receipts of business expenses. According to Generally Accepted Accounting Principles, an expense is defined as a payment or a liability created to earn income.

  The CRA says business expenses are “certain costs that are reasonable for a particular type of business, and that are incurred for the purposes of earning income. Business expenses can be deducted for tax purposes. Personal, living, or other expenses not related to the business cannot be deducted for tax purposes.”

  I suggest business owners consult an accountant or the Canada Revenue Agency to determine which expenses are deductible for your particular business.

  Common deductible expenses include accounting and legal (only expenses incurred to earn income), advertising (if used in Canadian media), business entertaining, automobile expenses (for a personal auto, only the portion used for business purposes), interest expense (business loans, credit cards, and lines of credit), repairs & improvements (improvements should be depreciated using capital cost allowance rates), and office expenses (including use of household expenses).

• Be aware of special tax rate programs: For example, for Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 11%. This applies to the first $500,000 of income. For income above this limit, the federal tax rate is 19.5%. Refer to the Canada Revenue Agency for additional information and provincial tax rates. Lower rates are meant to encourage businesses to grow their retained earnings for future reinvestment.

There are many other areas in tax management that can be discussed with your accountant. The basic idea is for you, as a business owner, to have a general idea of how tax planning can help you save money and manage your cash flow. Make sure you enlist the help of a professional and be up to date in changes in tax legislation that can affect your business. For more information please visit www.cra-arc.gc.ca.

Mauricio Vizconde is a BMO Branch Manager in Saskatoon.