If you are like more than two million Canadians, you own your own business, either fulltime or part-time. Despite the sometimes heartaches of being self-employed, there are many advantages. Many entrepreneurs, though, are unaware of the various tax benefits available to them. In fact, running your own business can increase your after-tax income and contribute to family wealth.
Entrepreneurship and self employment promote a spirit of innovation, ultimately contributing to economic growth and vibrancy. As such, the government encourages entrepreneurship by taxing it at lower rates than regular income.
It is not uncommon for a new business to incur losses as it gets off the ground. These losses can be used to offset revenue from other sources, assuming you have a reasonable profit expectation as the business progresses. As your business begins to turn a profit, you can incorporate and the profits can remain in the corporation as a reinvestment in your operations. It is also possible to leave the profits in the business if you do not need a salary immediately. Thus, you can defer paying personal income tax. A salaried individual cannot schedule when to pay taxes. However, when you are self-employed, you can time payments to yourself when the tax payments are to your benefit.
Profits held in the corporation are taxable in the year they are earned. But, the corporate tax rate is low on the first $500,000 of active business income. While rates vary between provinces, all are below 20%. Personal tax rates on comparable amounts can be as high as 45%. It is also possible to pay salaries to family members in the business and have it taxed at their lower rates. Another possibility is to pay dividends to family members who own shares of the company and, thus, benefit from capital gains exemptions.
There are numerous possibilities for self-employed Canadians to benefit from management of taxes and income. All possibilities and options should be discussed at length with your tax advisor.
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