Small business
owners - stay ahead of the taxman!
Every year, thousands of semi-retired baby boomers, budding entrepreneurs and people wanting to “follow their passion” join the ranks of small business owners and the self-employed. But while you’re living the dream, don’t overlook opportunities for saving money or staying in line with the taxman.
Here, Chartered Accountants Don Scott, FCA, Tax Partner with Welch LLP in Ottawa, and Jeffrey Sum, Senior Manager for Small Business for Meyers Norris Penny LLP in Markham, offer some important tax tips for small businesses which, like most other organizations and money-earning individuals, must contribute their fair share to the Canada Revenue Agency (CRA).
When it comes to taxes, small is good – We commonly think of small businesses as being privately held, says Scott. But for the CRA’s purposes, the metrics are a little more specific. Small businesses in Ontario are usually eligible for the lowest tax rates – about 15 or 16 per cent – on the first $500,000 of income. That’s a big lift from just a few years ago, when the ceiling was only about $200,000.
Tread carefully around capitalization – When it comes to taxes, value counts. A line in the sand is usually drawn around the $10-million-taxable-capital mark. For instance, a company that has $10 million of retained earnings could be worth $10 million, but there are many businesses worth $10 million or more due to unrecorded goodwill. You can lose some of the small-business tax incentives that the government offers after $10-million of taxable-capital and they disappear completely at about $15-million of taxable capital.
Let a qualified business valuator be your guide –Taxes are payable on the profits your business generates, and sometimes even on the business itself when you sell it. Often, Sum says that owners perceive their businesses to be more “valuable” than what potential buyers are willing to pay, so get a realistic and trustworthy assessment of its real worth. Whether you’re buying or selling, hire your own representative to conduct a thorough valuation.
It’s
all or nothing, almost – Small
business owners and the self-employed can be one and the same, especially
concerning expenses the government allows them to deduct for their
businesses. But for tax purposes, the important difference is between an
employee and the self-employed, says Scott. For employees, the
general rule is that nothing is deductible against employment
income, except for what the tax rules specifically allow. For the
self-employed and business owners, the reverse is usually true: everything
is deductible, except where a specific tax rule says it’s not.
If you need it to do business, deduct it – Generally, if it’s required for the purpose of earning income, the cost to purchase, maintain and operate it can be deducted from the earnings of the business, says Sum. But, he cautions, the CRA may not agree with everything owners sometimes think is “business-related”. Capital outlays may be needed but may not be immediately deductible.
Do it right, right at the start – Much can accomplished with proper planning, including reducing the amount of taxes you pay. The earlier you involve a Chartered Accountant in your business, the earlier you may benefit from alternative structuring models, tax deferrals, income splitting and other options that can save money, produce tax credits or even generate refunds. Registering a business, setting up to collect and pay HST, arranging payrolls and keeping proper and confidential records are all things a Chartered Accountant can help you arrange.
Make the most of the calendar – Incorporated small businesses can choose any date they want to be their fiscal year-end. November can be good for golf courses, but landscapers and tow-trucks may prefer springtime. Arrange it so the payments are due when you have the money to make them.
Hire the skills you need – Don’t try to save money by doing without expert advice that can save you many times what you pay for it. Hire a bookkeeper if paperwork is not your forté. Meet with a Chartered Accountant in your community before you start the business, so he or she can help you save on taxes and get the best possible terms for the amounts you will have to pay.
Brought
to you by The Institute of Chartered Accountants of Ontario
