Effective strategies to reduce your business taxes

You have to file taxes every year, whether or not your business is incorporated. Below are some tax strategies to implement throughout the year.

Incorporated businesses

Decide on a fixed year-end date¹

Did you know a company can choose when their fiscal year will end?

If you’ve just set up your corporation and decided that the end of your first fiscal year will be November 30, you’ll have to keep that date for all subsequent years. You’ll have 6 months (in this case until May 31) to file your taxes. However, you will have to ensure that the tax balance is paid within 2 or 3 months (depending on the tax rules applicable to the company’s specific situation) after the fiscal year end in order to avoid interest.

Depending on your situation, certain times may be better than others for your fiscal year-end. Here’s an example of a fiscal year that ends on January 31:

• The company could choose to pay a dividend or bonus to its shareholder in early January 2024 to reduce its tax liability for the year ended January 31, 2024.
• The shareholder would not have to pay taxes on this amount until April 30, 2025 (the normal filing date for the 2024 tax return).

Useful information about tax rates

In 2024, for an incorporated business with employees who worked more than 5,500 hours during the year, the tax rate will be 12.2% on the first $500,000 of taxable business income. This is known as the “business limit.” Any income over that will be taxed at a maximum rate of 26.5%.

“The company’s goal is to try to have a taxable business income below the business limit, which may have to be shared in the case of associate companies,” says Patrick Giroux.

Here are 4 ways to achieve that goal:

1. Pay shareholders a salary or bonus

Paying shareholders a salary or bonus generates an expense that helps reduce the company’s income.

2. Deduct commonly overlooked expenses

If a shareholder’s company doesn’t have a commercial space, it can pay rent to the shareholder. This rent is income for the shareholder, and in turn, the company will be able to deduct the rent paid.

• To offset the rental income, the shareholder can deduct expenses related to electricity, taxes, insurance, etc. based on the percentage of space used by the company.
• If the shareholder has to spend money on additional services, such as a cell phone or Internet, these amounts are also deductible. To do this, the company must file an expense report, allowing it to deduct the amount reimbursed to its shareholder. The same principle applies to expenses related to the use of a vehicle (purchase or lease payments, gas, repairs, maintenance, etc.). The shareholder will be able to file an expense report based on a rate charged per kilometre of business use.

3. Compensate family members

If your family works for the company, income splitting can be a good strategy. Here’s how it works: you pay your spouse or child a reasonable salary, say $15,000. If this is their only income, they won’t pay any tax on their salary. What’s more, the salary will be a deductible expense for your company and will lower your taxable income.

4. Pay a dividend

If your company has investment income, it may be beneficial to pay a dividend to the shareholder. “The company could get a refund of up to 38.33% of the taxable dividend paid,” says Patrick Giroux.

Unincorporated businesses

Use the cash damming technique

This technique allows you to turn personal debt into business debt, where the interest is deductible from the business income, thereby generating tax savings. The strategy involves:

• Isolating the business’s cash inflows (revenue account) from its cash outflows (disbursement account);
• Keeping cash in the revenue account to pay personal debts, taxes and living expenses;
• Borrowing to replenish the disbursement account, the interest on which is deductible.

Deduct all eligible expenses

You can deduct most expenses that are used to earn business income, for example:

• Monthly commercial rent
• Some of your home expenses (if you’re using it to conduct business)
• Internet and phone
• Office supplies
• Computer equipment
• Some of your personal vehicle expenses (if you use your vehicle for business purposes)
• Reasonable salaries you pay family members

Choosing your dates

If you plan to buy equipment or sell a building, make sure to time it right.

• If your tax year ends on December 31 and you plan to buy a computer, you’ll get a tax deduction faster if you make the purchase in December rather than in January of the following year.
• On the other hand, if you’re selling a capital asset (such as a building), do it in January of the following year to defer the tax consequences of the sale.

Incorporating your business

If you’ve been in the black for a few years, you should consider incorporating your business.

“You leave the company with business income that will be taxed at a lower rate, so that more capital can be used to reinvest in the company, repay debt earlier or build up an investment portfolio faster,” says Patrick Giroux.