5 Smart Tax Strategies for Canadian Business Owners

Hey everyone, Shawn Gander here with Simplify Accounting! Today, we’re diving into a hot topic: how business owners in Canada can legally save on taxes. While some people like to talk about “tax loopholes,” I prefer the term tax strategies—and trust me, there are plenty of strategies to help you keep more of what you earn.

Understanding Tax Deferral Strategies

When I mention tax deferral, I’m talking about shifting your tax liability to a future date. This allows you to pay less in taxes today and potentially less overall if you end up in a lower tax bracket later on. A perfect example of this is using Registered Retirement Savings Plans (RRSPs). You don’t pay tax on the money you contribute until you withdraw it later in life. In the meantime, that extra cash you didn’t send to the government can grow and help build your wealth faster.

Tax deferral is especially useful if you’re focused on wealth generation—having more cash to invest today means you’re accelerating the growth of your investments. Let’s be clear: deferring taxes isn’t avoiding them, and anything that crosses into tax evasion territory is a big no-no.

Don’t Be Fooled by “Tax the Rich” Rhetoric

You’ve probably heard politicians saying that we need to tax the rich to improve the country. What they don’t always tell you is that “the rich” includes people who make as little as $107,000 annually. In fact, the top 10% of earners pay over half of all income taxes in Canada! So if you’re running a business, the government’s definition of “rich” could very well include you.

Five Tax Tips for Business Owners

Now, let’s talk strategy. Here are five key ways you can save on taxes as a Canadian business owner:

1. Incorporate Your Business

If you’re not already incorporated, this is the top way to defer taxes. In some provinces, like Alberta and British Columbia, you can defer up to 37-42.5% in taxes on income under $500,000. But, incorporating only works if you plan to leave money in the company to grow. If you drain the company account for personal spending, you won’t see the benefits of tax deferral.

Once the money’s in your company, consider reinvesting it or using it to build your business. Keep in mind that passive income in a corporation is taxed heavily, but you’ll receive some of that back when you pay out dividends.

2. Prioritize Good Bookkeeping

I know, bookkeeping doesn’t sound exciting, but trust me, it’s crucial. A strong bookkeeping system can be the difference between saving on taxes and overpaying. If you accidentally miss a business expense because of poor record-keeping, you could end up paying over 50% in taxes on that amount. Keep your personal and business expenses separate and ensure your bookkeeper catches every deductible expense. We offer cloud accounting services at Simplify to help streamline your bookkeeping and ensure everything is in order.

3. Income Splitting

While some forms of income splitting—like paying dividends to family members—have been restricted, you can still income split by paying your spouse a reasonable salary. This works well if your spouse is in a lower tax bracket than you, helping to spread the income and reduce the overall tax burden.

4. Leverage Insurance for Tax Benefits

Certain insurance products can provide tax benefits, but this is typically a strategy for higher-net-worth individuals. Be cautious when approaching these strategies, as not all financial advisors fully understand the products they’re selling. Done right, they can shelter wealth over the long term, but be prepared to invest over 10-20 years.

5. Lifetime Capital Gains Exemption

If you’re planning to sell your business, this one’s huge. The Lifetime Capital Gains Exemption allows you to shelter up to $1.25 million in capital gains when you sell the shares of your corporation. If both you and your spouse own shares, you could shelter up to $2.5 million tax-free. This exemption only applies to corporations, so that’s another reason why incorporation is worth considering.

Bonus: Optimize Your Personal Taxes

Beyond the business strategies, don’t forget to optimize your personal tax return. Max out deductions and credits where possible, and take full advantage of registered accounts like TFSAs, RRSPs, and FHSAs. These are fantastic tools for building long-term wealth.

Focus on Building a Profitable Business

At the end of the day, it’s important to focus on building a profitable, value-driven business. While minimizing taxes is great, true success comes from providing real value to your customers and running your business effectively. And if you do that, you’ll not only grow wealth but also feel good about the work you’re doing.

If you’re ready to optimize your tax strategy, Simplify Accounting is here to help.