One way to maximize your business profits is by reducing your taxes.
Frequently, income and other taxes could be lowered significantly if
only the taxpayer were willing to plan ahead. By taking some simple
steps to rearrange your affairs, you could save a fortune!
1. Are You Splitting Your Business Income?
You may pay reasonable salaries to spouse or children through your
incorporated or unincorporated business. If you are not doing so,
you may be missing out on some real tax savings.
In the Canadian Federal Budget of February 16, 1999, measures were
introduced to discourage income splitting with minor children through
family trusts. However, these measures do not apply to paying
reasonable wages to family members. Thus, this may be one of the
last ways of legally splitting income left for the small business
person with minor children.
Obviously, the amounts paid must bear some relationship to the work
performed. Of course, all required payroll taxes should be remitted
and proper records need to be maintained.
Why not rearrange your affairs so that family members with little or
no income can perform duties for and be paid by your business? Then,
they can contribute out of their own income towards the operation of
the household. In this way, little or no tax will be paid by your
dependants and you will have successfully shifted taxable income out
of your hands.
2. Should You Register For The Goods And Services Tax?
Even if your business grosses less than $30,000.00 per year in taxable
sales, you may still benefit by registering your business to collect
the Goods and Services Tax (G.S.T.). If you are not doing so, you
may be missing out on some real tax savings.
For example, you will be paying G.S.T. on many of your business
expenses. If not registered for G.S.T., you must absorb this cost.
If registered, you may deduct the G.S.T. paid on such business expenses
(input tax credits) from the tax collected. Many business persons
expect to pay G.S.T. and it doesn`t really cost them anything since they
deduct such amounts as input tax credits from the G.S.T. they collect
from their customers.
In some cases, the quick method of calculating G.S.T. may actually
allow you to retain more of the G.S.T. collected than you would have
just claiming the G.S.T. actually paid by you.
A factor to consider also: If you are not registered for G.S.T.
in Canada, you are telling your clients that you do under $30,000.00
per year in taxable sales or that you cheat. Is this the image you
want your clients to have?
3. Could You Benefit From Incorporating Your Business?
Although incorporating your business may result in increased
accounting and legal fees (for setup, extra tax returns, and annual
minutes), the advantages of incorporation may justify this added
expense. Not only will you enjoy limited liability by incorporating,
but you may reap significant tax savings as well.
Corporations are often subject to lower tax rates on small business
income. In Canada, sales of shares of qualifying small business
corporations can obtain a lifetime $500,000.00 capital gains
exemption. Certain tax incentives and government programs are only
available to incorporated entities. Additionally, corporations can
be used for income-splitting and estate, retirement, and succession
4. Do You Engage in Tax Planning Year-Round?
Some people only worry about their taxes during tax season. However,
you will save a fortune in taxes, legally, if you make tax planning
your year-round concern.
Can you make some changes to turn your hobby into a moneymaking
business? Can you use that extra room in your house as a home office for
your business? Can you arrange to use your car more for business
purposes and have you documented your business use mileage? Can you
arrange for more of your entertainment expenses to be business related
and have you listed the business purpose on the back of each receipt?
Do you make business and personal purchases, investments, and other
expenditures with tax savings in mind. Do you document your expenses
well so that you they would survive a tax audit? Whenever you are faced
with a business or personal financial decision, do you consider the tax
Make year-round tax planning part of your business management mindset
and, thus, enjoy maximum tax savings. Yes, by rearranging your affairs
to account for tax implications, you will save a fortune in taxes.