Pay attention to tax rules for businesses and entrepreneurs in your financial plan
When it comes to determining which taxes you should know about, what can be deducted, and how to file those taxes accurately while saving the most amount of money, it’s easy to become overwhelmed.
Even though tax season comes hand in hand with a lot of confusion, spending a bit of time can actually make you money through tax breaks and rebates.
What to do
First off, make sure you register the right kind of business depending on your needs and size.
There are a few specific taxes that sole proprietor’s need to be aware of. These include personal and business income taxes, which determine net tax owing to the Canada Revenue Agency (CRA) after all personal and business tax deductions.
Self-employment taxes such as the Canada Pension Plan (CPP) payments and goods and services and harmonized sales tax (GST/HST) should be on your radar as well since you’ll have to file them (and charge them from clients in the case of GST/HST).
From a tax point of view, a Canadian-controlled private corporation (CCPC), has the most advantages. CCPC’s are eligible not only for the small business tax deduction but enhanced investment tax credits, as well as research and development tax credits if the CCPC qualifies.
Another significant advantage of a corporation is that business income can be paid out in the form of either a salary or dividends, which allows you to optimize for tax minimization.
Track every expense related to your business. It could get you a huge tax break at the end of the year.
Pay attention to tax deductions you can claim, including overlooked expenditures including travel, vehicle, education, inventory, meals and entertainment, home office, advertising and many others.
Since the CRA doesn’t work on the honour system, you will need receipts and documentation to prove what you spent was “ordinary and necessary.”
If the CRA audits you, it’s crucial you have a receipt present, going back at least seven years. Although you may still win a case without proof of receipt, it’s likely you would have to go to many unnecessary lengths.