Are you fed-up with paying high income taxes? As Mississauga Accountants, we understand your frustration, and have developed several tax planning strategies on “How to Save Taxes in Canada.
Are you fed-up with paying high income taxes? As Mississauga Accountants, we understand your frustration, and have developed several tax planning strategies on “How to Save Taxes in Canada.”
Many of our clients, who are individuals, business owners and investors, just like you, have saved thousands of dollars in taxes with our unique tax planning strategies, which are discussed below.
How to Save Business Taxes in Canada
1. Home office expenses can save business owners a significant amount of tax
If you own a small business and work from home, you can deduct expenses related to your home office, including:
- Mortgage Interest
- Property taxes
- Repairs and maintenance
- Rent paid
According to Mississauga Accountant, Allan Madan, home office expenses are one of the most over looked tax deductions by small business owners.
The home office expenses are prorated based on the size of the home office with respect to the total size of the home. The percentage of the above expenses that can be deducted is equal to:
Size of home office / Size of home x 100%
For example, if your home office is 100 square feet and your home is 1,000 square feet, then you can deduct 10% of the expenses related to your home office space.
2. Repay shareholder debt
Shareholder debt is the total amount of funds lent by a shareholder to his/her corporation, via cheque, direct transfer, or by expenses paid by a shareholder on his/her corporation’s behalf.
From a tax planning perspective, shareholder debt is important because it can be paid back tax-free to a shareholder. Therefore, if you are a shareholder of a company, we suggest that you withdraw money from your company as a repayment of shareholder debt, instead of taking a salary or dividends, both of which are taxable.
Before implementing any compensation strategy, such as the repayment of shareholder debt, we highly recommend that you consult a tax advisor in Mississauga first.
3. Pay Dividends, Not Salary
A dividend is a distribution of a corporation’s earnings, paid to its shareholders based on the number of shares owned.
For example, if you own 100 shares in your company, and your company declares a dividend of $80 per share, then your dividend would amount to $8,000.
Dividends are subject to a lower rate of income tax than salary and, in fact, the first $40,000 of dividends received
are not subject to tax at all. In the context of a family business, where both husband and wife are the sole shareholders, $80,000 in dividends could be paid from the family business without incurring any personal tax.
Therefore, we, the accountants in Mississauga recommend using dividends as a means to pay shareholders, because it is a tax effective compensation strategy.
Another tax benefit of paying dividends is that they are not subject to payroll taxes, which makes dividends more attractive than a salary.
4. Income splitting with a spouse and family members to save tax
As accountants, we recommend paying a salary to a lower income spouse or children to save taxes.
For example, let’s assume that your tax rate is 46.4% and your spouse’s marginal tax rate is 21%. It would make sense to pay your lower-income spouse a salary, and reduce your salary by the same amount. By doing this, you would realize a net tax benefit of 25.4% (i.e. 46.4% – 21%).
Furthermore, if your children are not working, they can each receive up to $10,822 in salary from your business without paying any tax. The salary paid to them is deductible for your corporation.
Income splitting is a complex tax strategy and should only be undertaken after consulting a tax professional.
5. Management companies – an effective way to save taxes
A management company is a corporation that performs administrative, marketing, accounting, and other similar tasks on behalf of another related corporation or individual.
Take the example of a high-income earning real estate agent who is in the top income tax bracket and is paying tax at rate of 46.4%. He decides to open up a management company owned by his spouse. The management company will perform all marketing, administrative and accounting work for the real estate agent at a rate of $75 per hour, plus a mark-up of 10% on costs incurred.
As a result of this strategy, the real estate agent’s expenses increase and the management company’s income increases. If, for example, the management company pays tax at a rate of only 16.4%, the real estate agent is saving 30% in taxes.
Management companies can be used in many industries, and are not exclusive to real estate.
Because management companies are very complex to set-up you should first consult with a business lawyer and Accountants in GTA. Learn how to save taxes in Canada the right way.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.