How To Optimize Canadian Corporate and Personal Income Tax When you’re an Entrepreneur

by | Dec 30, 2022 | Business Strategy

Being an Entrepreneur is hard work and isn’t a path for everyone. There is a saying that the flexibility entrepreneurship offers is only being able to decide when you’ll work 12 hours a day. With that said, however, starting and owning your own business can have notable tax advantages. 

If entrepreneurs use only some of the tax advantages available to them, they leave serious cash on the table. Below we discuss some common tax advantages entrepreneurs can use to reduce their overall tax burden.

Reduce Corporate Income with Eligible Expenses

Did you know that if you use space in your residence for a business office, you can expense a reasonable portion of your home expenses? For example, if the office is 150 square feet and the house is 2,000 square feet, you can reasonably expense 7.5% (150/2,000) of certain home expenses such as utilities, internet, taxes, and rent. 

For personal vehicles also being used for business purposes, as an entrepreneur, you can expense a percentage of the vehicle costs. You’ll need to keep track of when the vehicle is used for business purposes, and keeping a mileage log is a simple method to do this. With the vehicle’s total and business mileage, you can determine the percentage used for business purposes. 

One important thing to note on eligible business expenses is that entrepreneurs can only expense or ‘write off’ 50% of Meals and Entertainment expenses. This includes meals and entertainment expenses directly related to earning revenue, including taking a client out for lunch. 

How to Optimize Taxes Paid as an Entrepreneur

This is the ultimate question accountants get from their entrepreneurial clients: how do they reduce their overall tax burden by considering both their corporate and personal taxes? The reality is the answer is very specific for each entrepreneur, given the many variables to consider and that tax rules and regulations are constantly changing. This is where an entrepreneurial accounting firm like Provision CPA provides a tremendous amount of value. Driving home this point, the global tax advisory services market was nearly $35 billion in 2021. This market wouldn’t be the size it was unless entrepreneurs and businesses saw the benefits of these tax advisory services in orders of magnitude greater than the 2021 global market value.

Salary or Dividends

As an entrepreneur, you understandably want to pay yourself in the most tax-efficient manner and often think this means paying yourself mostly in dividends because they have a lower tax rate. The lower tax rate is true, but it’s due in part because dividends are a distribution of after-tax business earnings, so you have already been taxed. When you look at the total tax paid by the ‘business owner’ using either salary or dividends, neither compensation method is clearly better than the other. We suggest talking to an accountant about your goals and needs for your company.

Contributions to the Canadian Pension Plan (CPP) and Registered Retirement Saving Plans (RRSPs) are two other important considerations. If you take most of your business income in dividends, you won’t contribute to CPP, and your CPP benefits will be less when eligible to receive them. You also won’t build contribution room in your RRSPs, which may result in no tax benefit when saving for retirement. 

Shareholder Payables

While salary and dividends are typical methods for entrepreneurs to pay themselves, reducing shareholder payable accounts is also worth noting. As an entrepreneur, you’ll often lend your corporation personal funds that have already been taxed, and this is recorded on the balance sheet as a Shareholder Loan. A shareholder’s payable account can also grow incrementally over time when you, as the business owner, pay business expenses with personal funds. In both cases, you can use this liability to compensate/reimburse yourself. 

So, whether it makes sense to pay yourself a salary, dividends, or a mix of both will depend on your individual situation as an entrepreneur and business owner.

We’re Your Entrepreneurial Accounting Firm

As Entrepreneurial Accountants, our team at Provision CPA will run the numbers for you so you can have confidence knowing you are paying yourself in the most tax-efficient manner. Contact us today for more information.

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