Everybody has to pay their fair share of taxes. It’s part of being a citizen of our great country. Equally, it is part of owning a business in this country. It’s not always our favorite part, but it’s an important part.
But due to a confusing and sometimes archaic tax system, some people wind up paying more in taxes than they are legally obligated to do. This is particularly common in the startup world, as tax laws for digital companies and small businesses can be confusing.
And while paying taxes is good, spending too much is not necessarily good. This is particularly true if you are a new small business struggling to make ends meet as it is.
Of course, the best way to ensure you are not paying too much in taxes is to contact the best tax experts in Toronto. But before you do this, it might be best to get a rundown of possible tax breaks and whether or not you might qualify.
Losses Can Be Deducted to Reduce Your Taxes
If your business has just started or is in the process of creating, you can deduct any associated losses against all other sources of income. This can include your employment income or investment income.
These losses can be carried backward three years, deducted from past income, or taken forward twenty years to reduce future revenue. This, unfortunately, does not work if you are incorporated.
So, the best plan is to start unincorporated, as you anticipate startup-related losses. Later, you can incorporate it once your business has become profitable, which leads us directly to number two.
Once Your Business is Profitable, Incorporate It
Incorporated entitles your business to a low tax rate on the initial $500,00 active business income. Recent tax rate changes could vary somewhat if your corporation earns more than $50,000 annually in passive or investment income.
Active income in the corporation is taxed at a much lower rate than if the same amount of money were earned personally. This changes once you withdraw said revenue from the corporation through dividends or other similar means, making the tax rate about the same as if you had earned money personally.
Incorporating a business in Ontario is relatively easy if you are savvy in law and accounting or have a well-experienced lawyer and accountant by your side.
Exemption Through Lifetime Capital Gains
When you are finally ready to retire, there are huge benefits to be had from the lifetime capital gains exemption. The lifetime capital gains exemption is indexed annually and was counted as $855,000 in 2019.
This gets better if your wife, husband, or adult children also hold shares in the company. If this is the case, they may be allowed the same amount according to the lifetime capital gains exemption. But, the qualification rules can be quite strict.
First, there are individual tests for the time of sale and the previous 24 months. Also, there is a requirement that 50% or more of assets within the corporation are active for the two years before the business is sold. And 90% of the assets must be in use at the time of the sale.
This is a taste of the qualifying tests forexemptions of lifetime capital gainss. But it is something worth jumping through the hoops for.
This is only a small list of possible tax advantages the young Canadian business owner can take advantage of. Depending on your business, there are likely more specific to your field or the size and legal structure of your business worth checking out.
Because everybody pays taxes, it’s an important part of being a citizen in our great country and an equally great part of owning a business in this country. But you don’t need to pay more than is legally necessary.