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. One place this is particularly common is in the startup world, as tax laws for digital companies and small businesses can be particularly confusing.
And while paying taxes is good, paying too much taxes 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 make sure 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.
If your business has just started, or in the process of starting, you can deduct any associated losses against all other sources of income. This can include your own personal employment income or investment income.
Any of these losses can be carried backward three years and deducted from past income or can be taken forward twenty years to reduce future income. This, unfortunately, does not work if you are incorporated.
So, the best plan is to start out unincorporated, as you anticipate there to be startup related losses. Later, once your business has become profitable, you can incorporate, which leads us directly to number two.
Being incorporated entitles your business to a low tax rate on the initial $500,00 of active business income. Due to recent tax rate changes, this could vary somewhat if your corporation earns more than $50,000 annually in passive or investment income.
Active income that remains in the corporation is taxed at a much smaller rate than if the same amount of money were earned personally. This changes once you withdraw said income from the corporation through dividends or other similar means, making the tax rate about the same as if you had earned the money personally.
Incorporating a business in Ontario is a relatively easy process if you are savvy in law and accounting, or if you have a well-experienced lawyer and accountant by your side.
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 rules for qualification can be quite strict.
To begin with, there are individual tests for the time of sale, and for the previous 24 months. In addition, there is a requirement that 50% or more of assets within the corporation are active for the two years prior to the business being sold. And 90% of the assets must be in use at the time of the sale.
This is just a taste of the qualifying tests to qualify for lifetime capital gains exemptions. But it is really something worth jumping through the hoops for.
This is only a small list of possible tax advantages that the young Canadian business owner can take advantage of. Depending on your business, there are likely more that are more specific to your field or the size and legal structure of your business that are 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 really don’t need to be paying more than is legally necessary.