Personal Income Taxes for Business Owners and How to Lower Them
To Pay or Not To Pay; There Isn’t Really Any Question
Most Canadians have one choice with income taxes—pay what you owe to the Canada Revenue Agency (CRA). Small business owners do have other options, though. A small business owner can work with an accounting company like Shaw & Associates to figure out what works best for your personal income tax picture.
Incorporate? Salary? Dividends? Help!
The first discussion to have is whether or not to incorporate. Incorporated companies can have significantly reduced taxation rates, but there are some trade-offs in complexity. Again, this is a great discussion to have with your accounting company—will your company benefit from incorporating? What will work best if you do incorporate—pay yourself a salary, or pay yourself dividends?
Re-Invest in My Company?
If you have incorporated, you would probably be advised to keep as much money in the company as possible, rather than taking money out in dividends. This reduces the overall income tax rate of the owner, since corporate tax rates are better than personal ones. An additional benefit of putting more money back into your company is that the money can be used for growth and creating an even rosier financial picture for you and your family in the future.
Another option to think about is donations. Maximizing your charitable donations is another discussion to have with your accountant—which makes more financial sense, donating through the company or donating personally? How much donation minimizes your income taxes owed? Which charities qualify as a Canadian charity, and which ones don’t?
Here’s an article on business versus personal donations in Canada to help you get a better handle on this subject.
Deferred Income—Earn Now, Pay Later!
Another method of minimizing your tax burden is with a Registered Retirement Savings Plan (RRSP). An RRSP can be used to defer income, ideally from when you are a high-earning individual to when you will be a lower-earning individual. This is another strategy that is best worked out with Shaw & Associates, since how much income you take (in salary or dividends) will affect your RRSP picture, as well as other expenses you might want to claim.
For some more ideas on taxation strategies for small business, have a look at this article from thebalancesmb.com.
And, In Closing, Talk to Your Accountant
You’ve probably noticed a theme here—talk to an accounting professional if you want to keep more money in your own pockets! We are tax experts, and can guide you through the complexities of finding income tax savings for your business, and for you personally.
Contact Shaw & Associates Chartered Accountants for accounting help you can count on. One complimentary meeting with us will put you and your business on a more profitable and positive path.