If you're like most Canadians, paying taxes isn't your favourite aspect of running a business. And paying more than you have to? No thanks. Fortunately, with the end of 2015 upon us—and many new tax measures about to take effect in the New Year—there are some good opportunities for you to reduce the amount of taxes you pay. Here are a few you should pay particular attention to:
1. Selecting the right compensation strategy
Bonuses can be a great form of compensation, because they allow payment to be deferred until after year-end. While you can't rely on them completely, a compensation strategy that includes a combination of salary, bonuses and dividends can be a good way for owners/managers to reduce the income taxes they pay. However, where income is expected to be over $200,000 in 2016, consider paying bonuses and dividends before the end of 2015 to avoid a likely increase in the top rate of tax.
2. Maximizing the small business deduction
You're likely well aware that the first $500,000 of federal active business income in Canada receives preferential tax treatment by qualifying for the small business tax deduction. This deduction begins to phase out as a corporation's taxable capital exceeds $10 million and is eliminated completely when capital exceeds $15 million. What you may not know is, because "taxable capital" is equal to retained earnings, share capital and long-term debt, there are different ways to maximize the small business tax deduction—even as your business approaches the $10 million mark.
3. Purchasing new manufacturing and processing equipment before the end of 2015
Until the end of the year, all manufacturing and processing equipment qualifies for a 50 percent straight line depreciation rate. After the clock strikes 12 on January 1, 2016, however, acquiring such property will qualify for a 50 percent depreciation rate on a declining balance basis—which will result in a slower write-off of the equipment.
4. Taking advantage of a new lower tax rate
If your company qualifies for the small business rate and has a December 31 year-end, you're in luck! By deferring sales until 2016, you'll benefit from a lower tax rate—10.5 percent compared to the 11 percent you're paying in 2015.
5. Giving employees non-taxable gifts
Business owners aren't the only ones who like to lower their taxes—your employees will be sure to appreciate some non-taxable gifts this holiday season. For gifts and awards to qualify as non-taxable, they must be given to arm's length employees—and they can't exceed $500 in value annually. Non-cash long-service and anniversary awards are also allowed in addition to non-taxable gifts (but again, they must be under $500 annually). The best part? These non-taxable gifts can still be deducted as business expenses.
Because every business—and every tax situation—is different, there could be other opportunities available to help you lower your 2015 tax bill.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
