There are plenty of reasons to incorporate your small business. Compared to a sole proprietorship, in which there is no financial or legal distinction between you and the business, a corporation limits your personal liability. You can also benefit from the corporation tax, paying a lower rate when your business retains unneeded income.
Filing corporate income taxes is more complex than filing for personal income, and it can be more expensive, requiring the help of a professional.
But paying corporation taxes can benefit your business if you understand your obligations and find out how you can reduce those obligations.
More options for small corporations
There are several types of corporations in Canada. If you’re running a Canadian small business, it is most likely a Canadian-controlled private corporation (CCPC), which also happens to enjoy more tax reduction options than others.
To qualify as a CCPC, your business must:
- Be resident in Canada
- Not be controlled by a non-resident of Canada
- Not be controlled by a public corporation (there are exceptions for some venture capital corporations)
- Not be controlled by a corporation that lists its shares on a stock market
- Not list shares on a designated stock exchange
If your business meets these qualifications, there are a couple of ways you can reduce your corporation tax bill. One path is fulfilling certain requirements that open up business tax credits, while another is taking advantage of corporation income tax deductions.
How to reduce your corporation tax burden
Canadian corporations can reduce their tax bills in the following ways:
- Small business deductions.
- Business expenses.
- Corporation tax credits.
Looking for the latest information on the federal and provincial corporate tax rates in Canada? You’ll find links at the bottom of this post.
1. Small business deductions
One of the terms you will encounter when filing corporation taxes is the ‘Business Limit.’ This refers to the maximum amount that qualifies for the Small Business Deduction (SBD) tax rate. The SBD reduces the corporation tax rate on income up to the Business Limit.
In order to calculate your Small Business Deduction in dollar amounts, multiply the SBD rate by the lowest of the following amounts:
- Income from your business activities in Canada
- Your taxable income
- The business limit or reduced business limit
Your Business Limit may also be less if your corporate tax year is less than 51 weeks. In this case, you should divide the number of days in your corporate tax year by 365 and allocate it accordingly.
When it comes to the SBD, income only refers to business income, i.e. money earned from the company’s operations. It does not include income earned through investments or income earned by a personal services business. A personal services business is effectively an incorporated employee, providing services to another entity that would normally be performed by an employee.
2. Business expenses
Another way to reduce your corporate tax bill is to claim business expenses as tax deductions. The list includes:
- Accounting and legal fees
- Business vehicle expenses
- Bad debts (money owed to your business but not collected)
- Insurance expenses
- Meals and entertainment
- Office supplies
- Shipping and delivery
- Travel expenses
- Telecommunications costs
You can find a complete list of eligible business expenses here.
3. Corporation tax credits
Beyond expenses, certain activities can qualify your business for corporate tax credits. Below are some of the tax credits your business could qualify for, though this is not an exhaustive list.
Apprenticeship job creation
The Apprenticeship Tax Credit was created as an incentive for businesses hiring apprentices and creating long-term jobs.
Corporations can earn back 10% of eligible wages to a maximum of $2,000 per year, per apprentice.
Eligible apprentices are those working in trades listed as a Red Seal Trade and in the first two years of their contract.
The list includes traditional trades such as:
- Drywall finishers
- Hair stylists
Check the Red Seal list of trades for all the trades that qualify for the tax credit. It’s worth taking a look.
Research and development
If your company has engaged in qualifying research and development, there are numerous federal and provincial tax credits that you could apply for. The most notable is the Scientific Research & Experimental Development Tax Credit Program. These are typically only available to businesses that are CCPCs.
Tax credit for childcare spaces
Employers that are not in the childcare industry can receive a tax credit for creating new childcare spaces in new or existing facilities. These spaces can be for the children of employees or for other children as well.
The value of this credit is equal to either $10,000 or 25% of the eligible costs of each childcare space created, whichever is lower. If your business has invested in creating child care spaces for employees, don’t miss this valuable credit.
Where to look up your corporation tax rates
Corporate tax rates are subject to change. You can find Canadian corporate tax rates as posted by the Government of Canada if you need to look up your tax obligations for the year.
Provincially, there are two rates. The lower rate applies to business income that is eligible for the federal small business deduction. Depending on where your business is located, the federal business limit may apply, or the province may have its own. The higher rate applies to all income beyond the business limit in your province.
Filing your corporation tax returns
When you’re filing your corporation tax returns, you will need to use a T2 Corporate Tax Form. Completing the T2 form is more complex than the T1 Personal Income Tax Return and should be prepared by a professional. There are software programs that can help you prepare your corporation income tax, but be sure they are certified by the Canada Revenue Agency.
If you own an incorporated small business, make sure you take advantage of Business Expense Deductions, the Small Business Deduction, and tax credits to reduce your corporation tax obligations. Get a professional to prepare your T2 Corporate Tax Form and find out what your Business Limit for the Small Business Deduction is. These tax breaks are available to you, so be sure to claim all you qualify for.