Many talented employees leave their jobs and venture into the startup journey. Unlike a job where your expertise in just one field is sufficient, a startup needs you to be a jack of many things, such as legal, financial, and taxation. You might hear a lot about the many tax benefits the Canada Revenue Agency (CRA) offers startups, but making the most of them is where the skill lies. Making taxes efficient for your business could be a differentiator. 

Most startups close in the first few years as they are out of cash. Taking advantage of tax benefits can save you significant cash that you can use to make more money. It might be too late to postpone tax planning until the tax filing season. To become tax-efficient, you must follow some practices from Day 1. 

In this article, we will discuss things you, as a business owner, can do to manage your tax bills. 

How Startups Can Manage Tax Bills?

  • Advance Tax: Tax works differently for startups and employees. When you are an employee, your company pays taxes to the CRA on your behalf monthly or quarterly. Now that you are your own company, you pay your taxes. The tax becomes due as soon as you earn income. The due dates for paying these advance taxes are the 15th of March, June, September, and December. If your business made losses in a year, then you need not worry about advance tax. However, avoid delaying tax payments until April 30, as non-payment of advance tax attracts interest. 

Tip: To avoid interest and penalties, you can set aside 20% of your income for taxes. 

  • Hiring Your Family Members: As a startup, you want to pay as little tax as possible. If you have a spouse or parents whose skills can come in handy, you can hire them. You can pay them a salary per industry standards for hours worked, keeping the money in the family. With each member earning a nominal amount, you can benefit from their low tax brackets to distribute the income. Three people earning $50,000 each are more tax-efficient than one earning $150,000.
  • Record Every Transaction and Store All Receipts: Whether you are a sole proprietor or a corporation, as a business, you can deduct business expenses from your taxable income. The CRA allows startups to deduct the expenses they incurred to earn revenue. Whether it is rent, utility, maintenance, principal of the loan, vehicle cost to visit clients or make deliveries, all these can be deducted. Note that vehicle cost from travelling to the office from home is not a business expense. 

However, you can only deduct these expenses if you save the bills and receipts. You must meticulously record the transactions, detailing everything to prove the expense was incurred for business purposes and not personal use. 

  • Capital Cost Allowance: When you are a startup, you may incur costs to buy specific equipment or car. Such purchases have significant initial costs. The CRA allows you to deduct this capital cost you incurred in a phased manner through depreciation. It lists depreciation rates you can apply in the first year and subsequent years. Some assets are 100% deductible. This deduction could help you reduce your tax bill significantly. 
  • Using Losses: A startup only pays tax on profits. If you made a loss in the initial years, you could carry forward these losses to offset future profits and reduce the taxable income. 
  • Creating a GST/HST Account: If your annual revenue crosses the $30,000 mark, you must create a GST account and charge GST to your clients. However, if you incur significant expenses initially, you can register for GST and claim an input tax credit (ITC). For instance, if you paid $3,000 GST on various business expenses and asset purchases, you could claim it by filing GST returns. The ITC can bring you significant savings. 

The above practices have to be followed by everyone from a freelancer to a corporation to make tax efficient for your startup. The above practices can give your tax consultant enough room to avail yourself of the many tax benefits. 

Impact of Business Structure on Taxes 

However, some strategic decisions, such as your business structure, should be considered from the tax perspective. 

A sole proprietor files and pays taxes through personal income tax returns. They can take advantage of the above business expense deductions and reduce taxes by investing in registered retirement savings plans (RRSP) and Canada Pension Plan (CPP) contributions. A partnership can divide the income between partners and reduce the tax bill. 

A corporation can avail itself of many tax credits the CRA offers specifically for corporations. For instance, a $500,000 Small Business Deduction allows incorporated companies to pay a 9% corporate tax on the first $500,000 income. However, incorporating a business is expensive and comes with stringent reporting requirements. The tax savings should be more significant than the cost of incorporating. Before jumping on to this decision, discuss with a tax expert whether it is feasible. 

Specific Tax Benefits

The CRA allows individuals, trusts, and corporations conducting research and development to claim Scientific Research and Experimental Development (SR&ED) Tax Incentives. The incentive program has some eligibility criteria. Like this, there are many tax credits for specific businesses. A tax consultant is well-versed in these benefits and can help you avail yourself of those you are eligible for.  

Contact Ford Keast LLP in London to Help You with Tax Planning 

Taxes can get overwhelming, but a skilled tax consultant can help you optimize your taxes, avail CRA benefits, and plan your next business move considering the tax angle. At Ford Keast LLP, our tax consultants can help you with tax planning and strategizing. To learn more about how Ford Keast LLP can provide you with the best tax planning expertise, contact us online or by telephone at 519-679-9330

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