"There are a number of tax-planning opportunities that can significantly help small business owners boost their bottom line," said Mark Shoniker, Director, Commercial Banking, Bank of Montreal. "From choosing the right payment method to maximizing income-splitting, entrepreneurs should work with a tax expert – such as a Chartered Accountant – to make the most of the tax strategies available to them."
Small business owners can also check with their financial institution for tax information. BMO Bank of Montreal’s SmartSteps for Business (bmo.com/smartsteps), is a new online tool providing entrepreneurs with a customized plan to make their banking more efficient, while taking care of financial needs that go beyond their businesses.
Key tax tips for business owners found on SmartSteps for Business include:
Family-run businesses can capitalize on income-splitting by hiring a spouse or children as employees, since a reasonable salary is deductible. They pay the tax themselves, and if they pay at a lower rate, there could be tax savings for the overall family.
Take caution to ensure their pay is reasonable, their roles in the company are clearly defined, and their performance is well documented.
Deductions for small businesses
A small business tax deduction can reduce the combined corporate tax rate on the first $500,000 of active business income to as low as 12 per cent.
The deduction may be available if your company qualifies as a Canada Controlled Private Corporation (CCPC), carrying on an active business in Canada.
Exemptions for capital gains
Small business shares can qualify for a lifetime capital gains exemption of up to $750,000. Some rules apply, however, including that the claimant must have owned the shares for at least two years before selling.
Small business owners who have incorporated their business have greater flexibility in determining how to be compensated, such as choosing to pay themselves a salary, dividend, or both.
For example, a reasonable salary can create personal RRSP room, provide a deduction for the business, and help bring taxable income below the $500,000 threshold for the small business deduction. On the other hand, a dividend may be taxed at a lower rate for the owner than a salary or bonus, but would not be deductible for tax purposes.
It is important to note that with corporate tax rates poised to decline in Canada, knocking down profit to below $500,000 by taking out salaries may not be the best strategy. Instead, small business owners could pay the corporate tax rate instead of the top personal rate, and wait until funds are needed before paying a dividend.
"Entrepreneurs can always benefit by dusting off their books and doing a little spring cleaning," added Mr. Shoniker. "Evaluate your goals, review your tax strategy with a CA, and use BMO SmartSteps for Business for tips on boosting efficiency and productivity."
Remember, the deadline for Canadian businesses to file their tax returns is June 15, 2010, and any tax outstanding and owing to the Government must be paid to the CRA by April 30.