6 Tips For Startup Business Taxes in Canada
Millions of Canadians work as employees at organizations and are used to filing standard annual income taxes —a fairly straightforward process for most people. As a new startup business owner, there are now new things to consider, know, and keep track of.
We have provided 6 tips for startup business taxes to make this easy to navigate.
1. Know what expenses you can claim
When you are first getting your business off the ground, there are startup expenses you incur that are necessary for your business to operate. Many reasonable and legitimate expenses can be claimed as business startup tax deductions. Some of these items may include:
- Equipment and Technology
- Supplies
- Business fees and licenses
- Vehicle expenses
- Legal and accounting fees
- Insurance
2. Stay organized and TRACK EVERYTHING
One of the biggest tax tips we can provide to entrepreneurs is to always be organized. From every business expense to income earned, keep receipts and detailed records. The importance of keeping good records cannot be overstated enough for a few reasons:
- It is required by law to keep all records. Be aware of your responsibilities and how long you must keep records for, which is generally for a period of six years from the end of the last tax year they relate to.
- It will make your life a lot easier and less stressful when it comes time to file your taxes.
- In the event you are audited by the Canada Revenue Agency, having clear and organized records will make this process much easier than if you cannot account for your business activities.
3. Be informed of all available tax credits
As a small business startup, tax credits can go a long way. Become familiar with all tax credits you are eligible for which may include:
- Canada Caregiver Credit
- Health Spending Account (HSA)
- Disability Tax Credit
- Canada Child Benefit
4. Balance your Dividend/Salary Mix
As a startup business, you can withdraw money from your company either as a dividend or salary. Paying yourself a healthy salary provides an opportunity to maximize your RRSP, but you may also want to take out part of your pay as a dividend to take advantage of a lower tax rate. Knowing how to balance the two can maximize your earnings, but you must be aware that every startup business owner’s circumstances are different. What may be a great decision for one person may not be as smart for another.
5. Consider Income Splitting
Many startup business owners choose to pay family members a salary, as any salary paid out will count as a business deduction. However, the salary must be reasonable in relation to the position your family holds at your company. For example, a typical entry-level position should not be earning a salary that is well over the average in your region.
6. Determine what is best for your budget
In the past you may have been an employee and taxes were deducted from every pay. This hopefully resulted in no large sum of taxes due at the end of the year. Now as a startup business owner, this does not happen. It is your job to determine what fits best within your startup budget. You may want to consider paying income taxes every month to avoid one large payment. This can be set up with the CRA and can be easier to manage throughout the year.
Where do you find help with startup business taxes?
From year to year, there can be changes to tax law and tax credits available to startups. To keep up-to-date, we recommend choosing a CPA firm that understands startups and can advise you on what is best for your business.
In addition to acquiring the services of a tax professional, having a startup mentor is a great way to learn from someone who has been where you are in your journey, or has expertise to advise you to make smart choices. A startup incubator has experienced mentors, fantastic programs, knowledge, and opportunities to help you plan for startup taxes and aid in your company’s overall growth and success.
