A small business is a corporation, sole proprietorship, or partnership that has no more than 10 non-shareholding shareholders and/or partners. As such, the small business tax rate applies to all profits earned by these types of entities. This can be a real benefit for an incorporated company that has been paying higher rates in its previous home country. If you have questions about the benefits of incorporating your business in Canada and how this could affect your financial situation, contact us today!
Incorporating your business in Canada allows you to deduct expenses that are incurred while earning business income
Incorporating your business in Canada allows you to deduct expenses that are incurred while earning business income.
You may be able to claim an expense as a deduction if it is not reimbursed by your employer or a government program, or if it’s not reimbursed by another third party (e.g., a client). For example:
- You can deduct the cost of travel and entertainment when you meet with clients even though they don’t pay for these services;
- If you drive yourself around town instead of taking public transportation because it’s cheaper than gas prices, this could qualify as an eligible driving expense; And
As a small corporation, you can receive a 15% federal tax credit when you pay dividends
The 15% tax credit is only available to active business income. Active business income includes dividends, interest, and rent received from property used in your trade or business. Passive income (such as interest) is not eligible for this tax credit.
The 15% federal small business deduction can be claimed by the taxpayer on Schedule 1 at Line 108 of Form T2125 and page 2 of their T4A slip (if applicable).
A small corporation is also allowed to claim a reduced corporate tax rate on the first $500,000 of active business income
The small business corporate tax rate is available to Canadian-controlled private corporations (CCPCs) with active business income. It reduces the amount of income that is subject to corporate income tax and provides greater financial flexibility for businesses.
The maximum amount of active business income eligible for the small business deduction is $500,000 per year ($10 million in total), which means you can use it only once per calendar year. However, if your corporation earns less than this threshold amount during any given calendar year, it may still claim this deduction by reducing its taxable capital gains from earlier years and filing an amended return for that year.
Companies with more than one employee may be able to claim the Small Business Deduction
The Small Business Deduction is available for companies with more than one employee. It can be claimed on line 369 of the tax return, which means that you’ll need to keep track of how much it’s worth and claim it accordingly.
The amount of your deduction depends on your province and whether or not you have employees in multiple countries (see below). In Ontario, for example, up to $500,000 may be deducted from your active business income (that’s anything over $150,000) if all three criteria are met:
- You have at least one employee working full-time;
- At least 75% of their salaries come from the business; and
- Their duties include managing customers or clients.
There are several benefits for incorporated businesses in Canada
In Canada, the small business tax rate is 15%. This means that if you have a corporation that does not pay any corporate income tax (it’s considered an active business), your taxable profits in 2019 will be lower than they would be if it were incorporated as a Canadian corporation. The following are some of the benefits and advantages that come with incorporating:
- Tax credits for small businesses: There are several tax credits available to help corporations with their expenses and taxes. These include film production and post-production services; research & development; environmental protection programs; scientific research activities (including IT infrastructure); arts & culture projects (arts & heritage organizations); sports activities such as golf courses or ski resorts; heritage properties conservation efforts by municipalities/local bodies etc., among others
What does this mean for you? If you’re considering incorporating your business in Canada and want to know more about the benefits of doing so, we encourage you to contact a professional accountant today.