Maximize your profits. Minimize your taxes.
Corporate Tax-Efficiency Strategies
Here are some tax-efficiency strategies for Canadian business owners to reduce their tax liability on investment and corporate income:
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Consider income splitting strategies with family members, such as paying reasonable salaries to spouse or children who contribute to the business. Shareholders may also benefit from issuing dividends to family members in lower tax brackets.
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Take advantage of CCA deductions by properly claiming depreciation on eligible capital assets. This allows you to deduct a portion of the asset's cost each year, reducing taxable income.
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If eligible, claim the SBD to benefit from a lower tax rate on active business income. This deduction is available to Canadian-controlled private corporations (CCPCs) on their first $500,000 of eligible income (in most provinces).
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Establish a holding company to separate active business income from investment income, providing potential tax advantages and flexibility in managing funds.
See other corporate tax credits and refunds strategies below.
Remember that tax planning strategies should align with your business goals and comply with applicable tax laws. It's important to consult with a tax professional to determine the most suitable tax-efficient strategies based on your specific situation.
Notional accounts
In Canada, there are various notional accounts that corporations can use to enhance profitability and optimize their tax strategies. Notional accounts only exist on paper for doing taxes. Here are some notional accounts commonly used by Canadian corporations:
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The CDA allows corporations to distribute tax-free capital dividends to shareholders. It keeps track of the non-taxable portion of capital gains, life insurance proceeds, and certain other amounts. Capital dividends can be paid out to shareholders tax-free from the CDA, providing a tax-efficient way to distribute profits.
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The GRIP account is a notional account that tracks eligible dividends received by a corporation. This account describes the amount of money that a Canadian Controlled Private Corporation (CCPC) can pay out as eligible dividends to its shareholders, which are taxed at a lower tax rate. Learn about the GRIP Balance Calculation on the next page.
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The RDTOH account keeps track of the refundable dividend tax paid by a corporation on eligible dividends received from other corporations. It allows the corporation to claim a refund of the refundable dividend tax when it pays dividends to its shareholders. The RDTOH account helps mitigate the potential double taxation of dividend income.
Learn about the RDTOH Calculation on the next page.
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Corporations can carry forward non-capital losses incurred in previous years to offset future taxable income. This allows them to reduce their tax liability by utilizing losses from previous periods against current or future profits.
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ABIL is a special provision that allows corporations to deduct losses incurred from investments in small businesses or certain shares. It provides tax relief by allowing the deduction of a portion of the investment loss against other sources of income.
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The CDE is an election that allows the conversion of taxable dividends into tax-free capital dividends, subject to certain conditions. It provides corporations with additional flexibility to distribute profits as tax-free capital dividends.
It’s recommended to consult with a tax professional or refer to the official guidelines from the Canada Revenue Agency (CRA) for accurate and up-to-date information regarding notional accounts and their application in Canada.
More on Refundable Dividend Tax On Hand (RDTOH)
The amount of Eligible dividends a corporation can pay out to shareholders is determined by the GRIP balance.
Once paid out the corporation is entitled to a RDTOH refund rate depending on the type of dividend or passive income stream.
For instance, eligible dividends received from taxable Canadian corporations are subject to a 38.33% refundable tax, which is all added to the RDTOH account, whereas foreign dividends are subject to a 30.67% refundable tax
The RDTOH is tracked in two separate accounts for this reason:
GRIP Balance
The main purpose of the GRIP balance is to help corporations determine the portion of eligible dividends that can be paid out to shareholders at a lower tax rate.
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The basic formula to know how much can be paid out in eligible dividends is:
[Net profits – $500K (only corporations that are not taxed at the SBD lower rate can payout eligible dividends) * 0.72] = eligible dividends amount for payout (added to the GRIP Balance).
The calculation for the General Rate Income Pool (GRIP) balance involves tracking the cumulative eligible dividends received by a corporation.
The calculation is performed annually to update the GRIP balance based on the eligible dividends received and paid out during that particular taxation year.
Here's a simplified explanation of how the GRIP balance is calculated:
It's important to consult with a tax professional or refer to the official CRA guidelines for accurate and up-to-date information on the utilization and implications of the GRIP balance in their tax planning and dividend distribution strategies.
Business expenses and tax deductions
A tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe.
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Definition
The cost of renting office space for your business.
Tax deduction
Generally, the full amount of rent paid is deductible.
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Definition
Expenses related to a dedicated space in your home used exclusively for your business.
Tax deduction
Deductions are based on the portion of your home used for business purposes.
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Definition
Expenses related to utilities such as electricity, water, heating, and internet services for your business premises.
Tax deduction
Generally, the full amount of eligible utility expenses is deductible.
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Definition
The cost of purchasing office supplies, stationery, computer equipment, software, and other necessary materials.
Tax deduction
Generally, the full cost of business supplies is deductible.
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Definition
Expenses incurred for business-related travel, including transportation, accommodation, meals, and parking.
Tax deduction
Deductions are based on the portion directly related to business activities.
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Definition
Premiums paid for business insurance coverage.
Tax deduction
Generally, the full amount of eligible insurance premiums is deductible.
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Definition
Expenses related to advertising and marketing efforts to promote your business.
Tax deduction
Generally, the full cost of eligible advertising and marketing expenses is deductible.
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Definition
Fees paid to professionals such as accountants, lawyers, consultants, and bookkeepers for business-related services.
Tax deduction
Generally, the full amount of professional service fees is deductible.
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Definition
The salaries and wages paid to employees of your business, including yourself.
Tax deduction
Generally, salaries and wages are deductible expenses.
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Definition
Contributions made to employee benefit plans such as health insurance or retirement plans.
Tax deduction
Generally, contributions to eligible employee benefit plans are deductible.
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Definition
Expenses for professional development, training courses, workshops, and conferences.
Tax deduction
Deductions vary based on the relevance to your business and the nature of the expenses.
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Definition
Expenses for meals and entertainment incurred for business meetings or client interactions.
Tax deduction
Generally, only a percentage (usually 50%) of eligible business-related meals and entertainment expenses are deductible.
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Definition
Expenses related to using a vehicle for business purposes, such as fuel, maintenance, repairs, and insurance.
Tax deduction
Deductions are based on the percentage of business use and may include fuel, maintenance, repairs, and insurance. It’s important to keep a mileage log to measure this at fiscal year-end.
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Definition
The deduction for the depreciation of capital assets used for business purposes.
Tax deduction
Deductions are based on the applicable depreciation rate and the useful life of the asset.
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Tax credits and Incentives
In Canada, there are various tax refunds and credits available for individuals and corporations on passive and active income taxes paid.
Individual
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A refundable tax credit provided to lower-income individuals or families to offset some or all of the GST/HST paid on goods and services.
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Formerly known as the Working Income Tax Benefit (WITB), this refundable tax credit is available to low-income individuals and families who are working, providing additional financial support.
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Individuals can claim a non-refundable tax credit for eligible medical expenses that exceed a certain threshold, reducing their overall tax liability.
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Individuals receive a non-refundable tax credit for donations made to registered charities, encouraging philanthropy while reducing their tax burden.
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First-time homebuyers can claim a non-refundable tax credit for qualifying home purchase costs, such as legal fees and land transfer taxes.
See other corporate tax-efficiency strategies on this page.
Corporate
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Contribute to Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) to take advantage of tax deferral or tax-free growth on investments held within these accounts.
RRSP contributions can provide immediate tax deductions, while TFSA investment income and withdrawals are tax-free.
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Consider setting up a Registered Pension Plan (RPP) or a Personal Pension Plan (PPP) to create tax-deductible contributions and secure retirement savings.
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Consider income splitting strategies with family members, such as paying reasonable salaries to spouse or children who contribute to the business. Shareholders may also benefit from issuing dividends to family members in lower tax brackets.
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Corporations engaged in specific industries, such as manufacturing or clean energy, may qualify for investment tax credits on eligible expenditures, encouraging investment and innovation.
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Explore opportunities to claim tax credits for eligible research and development activities. The SR&ED program provides incentives to encourage scientific research and development in Canada.
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Certain small businesses may be eligible for a refundable investment tax credit, providing a refund on a portion of eligible expenditures.
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Corporations involved in eligible film and media production activities may be eligible for refundable tax credits based on qualifying expenditures.
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Make charitable donations to registered charities to benefit from tax credits and reduce taxable income.
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Other Income Tax-Efficiency Strategies - Pension and Savings plan
There are several pension and savings plans available to Canadian citizens, each with its own features and tax benefits.
Here are a the most common:
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Definition
An individual retirement savings plan that allows contributions to grow tax-free until retirement.
Tax Benefits
Contributions are tax-deductible, reducing taxable income.
Tax Treatment of Contributions
Pre-income tax money
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Definition
An employer-sponsored pension plan providing retirement benefits based on a predetermined formula.
Tax Benefits
Contributions (employer and/or employee) are generally tax-deductible.
Tax Treatment of Contributions
Pre-income tax money
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Definition
A savings account allowing tax-free growth of investments throughout an individual's lifetime.
Tax Benefits
Contributions are not tax-deductible. Investment income is tax-free.
Tax Treatment of Contributions
After-income tax money
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Definition
A pension plan where contributions are invested, and the pension benefit is based on the contributions' performance.
Tax Benefits
Contributions (employer and/or voluntary) are generally tax-deductible.
Tax Treatment of Contributions
Pre-income tax money
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Definition
An employer-sponsored plan distributing a share of profits to eligible employees in the future, usually at retirement.
Tax Benefits
Employer contributions are not taxed until withdrawal.
Tax Treatment of Contributions
Pre-income tax money
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Definition
A savings account allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits)
Tax Benefits
Contributions are tax-deductible, reducing taxable income.
Tax Treatment of Contributions
Pre-income tax money
It's essential to understand the specific rules and contribution limits associated with each pension plan type, as they can vary.
Individual circumstances and retirement goals should be considered when choosing the most suitable plan.
We are working on a project to help young entrepreneurs simulate the most tax-efficient way to setup their business based on their unique financial situation