When building your economic value, the tax rule is simple: pay the least amount of income tax as legally possible. To get there you need planning and organization. With Silver + Goren by your side, accomplishing this is simple too.
You pay tax in Canada on your net business income, and the amount you pay is determined by different tax rates per level of income. Net income is the difference between gross income for your fiscal period (everything you make) and your deductible business expenses. Generally speaking, an expense is deductible if its purpose is linked to earning income, it’s reasonable, and not capital in nature. Examples of these can include business vehicle operating costs, certain meals or office supplies.
To effectively minimize your taxes, first make sure you have deducted every legitimate expense you can. Please see our Record Keeping section for suggestions.
Here’s a look at some of the different tax rates. On your personal return, the lowest rate applied on taxable income in Ontario below approximately $40,000 is 20%. Between $40,00 and $80,000, you pay approximately 32%, between $80,000 and $120,000 is 43% and above $120,000 is 46%. For corporate income in Ontario, the tax rate is 16% for income below $500,000 and 33% on income above $500,000.
The next key to effective tax planning is organizing your income so you fall into the lowest tax bracket possible. The best way to do this is to have an appropriate mix of income between your Corporation, yourself and your family.
Consider incorporating your business when its net income is greater than the amount you need to withdraw for personal needs. This excess income will be taxed corporately at 16% rather than at your marginal tax rate (which can be as high as 46%). You’re looking at a difference of up to 30% in taxes on your excess income.
The third major income tax minimization and planning step is income splitting. Consider hiring family members to do necessary business tasks, giving you more free time to do strategic work. This allows you to pay income to your kids and spouse, who will likely be taxed at a much lower rate than you.
You can also do this type of income splitting by having your spouse and children over the age of majority acquire shares in your Corporation. You can pay dividends, which they can use for some of their expenses such as university tuition. There are other issues to consider besides income tax savings when issuing shares to children and we recommend you speak to our team before doing this.
We at Silver + Goren believe these are three of the major keys to minimizing your taxes as a small-business owner. Please contact our office to arrange a free one hour consultation to review your tax planning needs – and see what else we can do for you.