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Small and medium enterprise owners can be the backbone of any economy and this is particularly true for Canada, especially in challenging economic times. The Federal Government recognizes this and certain aspects of our tax system reflect the desire to help business owners succeed. Having said this, there are several highly valuable tax incentives available to businesses - are you taking advantage to the maximum extent possible?
One of the largest tax incentives available to business is the low rate of corporate tax available on small business income. Federally, business owners pay only 11% tax on business profits for tax purposes for income up to $500,000. The Provinces levy an additional amount but this varies. In Alberta, a corporate small business owner pays 14% tax on income up to this threshold. This assists growing Canadian businesses by ensuring that the remaining 86% of profits earned in the business can be reinvested without further incidence of tax. On profits above this $500,000 threshold in Alberta, the rate rises to 25%.
Conventional tax planning wisdom has been to “bonus down” to the small business limit of $500,000. If the business still needs cash (what growing business doesn’t?) why not skip the bonus and pay corporate tax at 25% instead of personal tax at the highest Alberta rate of 39%? The tax deferral of 14% could finance a new equipment purchase or marketing campaign.
In this new era of favorable corporate tax rates, the “bonus down” strategy only makes sense in limited circumstances. If you are still applying this strategy year after year without giving thought to alternatives, seek a second opinion!
Recently, there has been a push from the Federal government to increase innovation among business in Canada. It has been said that Canada lags behind comparable economies in this critical area and business innovation can be the biggest boost to a growing economy. In order to accomplish this goal, the Scientific Research & Experimental Development (SR&ED) Investment Tax Credit Program has been built into the tax system. Small Business owners can earn up to 35% of their research costs back in the form of this valuable credit. Furthermore, small businesses in growth mode not earning taxable profits can receive this Investment tax credit in cash.
Interestingly, even if you don’t think you’re in the business of innovation – if you’re in business, you are likely making business investments and improvements. If you are investing and your work takes you into new areas, you could be eligible for the credits. Industries including manufacturing and technology have been traditional benefactors of the program however many companies in the oil and gas production and service industries can also qualify. Even medical professionals can obtain credits.
Good advisors will come speak with you, without charge, to determine if you might qualify and to help guide you through the process. Make the call!
Business owners in Canada also can cash in on another great tax incentive when they sell their business. The first $750,000 in gains on the sale of certain small business shares can be received tax-free. Even where a share sale is not feasible, see a tax advisor who can help you navigate other options to crystallize your access to this benefit. This saving is not automatic so anytime you are considering selling the business, you should contact your advisor well in advance to maximize this benefit.
Being in business in Canada has its risks and rewards as all small business owners know. In order to meet multiple mandates the Canadian tax system is complex. However, this complexity alone should not hinder your access to tax incentives available. Ensure you are getting the best professional advice to help you navigate the rules to take advantages of these and many other benefits available to entrepreneurs and owners.
Related Topics:Corporate Tax; Tax Credits; Scientific Research and Experimental Development
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