Tax Planning for Small Businesses in Canada

Five levels of tax planning for Canadian small business owners. We'll look at the tax planning strategies in order of risk and complexity - plus you'll get a bonus tip from CPA Joe.
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CONTENTS OF THIS VIDEO
00:00 - Intro
00:42 - Level 1 - RRSPs and TFSAs
02:03 - RRSP Summary
02:38 - TFSA Summary
02:58 - RRSP vs TFSA - Which to Choose
03:34 - Level 2 - Incorporate Your Business
04:24 - Drawbacks to Incorporating
04:54 - Benefits of Incorporating
06:06 - When Should You Incorporate Your Business?
06:43 - Bonus Tip from Joe
07:23 - Level 3 Corporate Structuring
07:45 - Benefits to Using a Holding Company
09:21 - Level 4 - Health Insurance and Life Insurance
10:00 - Health Insurance for Tax Planning
10:33 - Life Insurance for Tax Planning
12:45 - Level 5 - Tax Havens and Loopholes
13:50 - Final Thoughts
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MENTIONED IN THIS VIDEO
► Tax Planning for Small Businesses Blog Post www.avalonacco...
► How Marginal Tax Rates Work www.avalonacco...
► When Should You Incorporate Your Business www.avalonacco...
► Holding Companies in Canada www.avalonacco...
► Canadian Millionaires Dodging Taxes www.cbc.ca/new...
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AVALON ACCOUNTING
Avalon is a virtual accounting firm located in Canada. We aim to be THE online accounting department for small businesses in Canada.
We provide online bookkeeping, accounting services and expert financial advice for small businesses.
We are on a mission to educate small business owners through our KZbin channel, blog and free resources. Check out our links below to dive in.
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FAQs
► What Can I Write-off? bit.ly/EXPENSESCAN
► Should I incorporate my business in Canada? bit.ly/INCORPCAN
► What is a shareholder loan? bit.ly/SHLOANCAN
► When and How Should I Hire an Employee? bit.ly/hirelike...
► Should I offer profit sharing? bit.ly/PROFITSH...
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BEST ONLINE TOOLS FOR SMALL BUSINESSES
We've curated a list of our favorite online tools to help small business owners get stuff done and thrive. Check out our list linked below.
► www.avalonacco...
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FREE BUSINESS GUIDES:
► Starting Your Business Guide:
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► Financial Foundations Guide:
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► $1 Million Dollar Service Based Business Guide: joecollins.typ...
► Manage Your Own Bookkeeping Course:
avalonacountin...

[@RyanThomasWoods]

Small business owner here! Subscribed a while ago and appreciate all the tips and videos! Would love if you covered how CCA works per class with examples for bookkeeping / accounting purposes! Haven’t found a video on KZbin that actually covers this yet gets searched a lot from new business owners

[@AvalonAccounting]

Hey Ryan - thanks for your comment! I can add that to the topic list. In the meantime, the article linked below has some info on current vs. capital expenses when doing bookkeeping. www.avalonaccounting.ca/blog/small-business-bookkeeping-guide#toc-16 And this is one of CRA's info pages on the subject. www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance.html I agree there isn't a great reference out there for new business owners but it's on my list now!

[@RyanThomasWoods]

@@AvalonAccounting thanks for sending me your link! I’ve reviewed CRA’s website but it doesn’t really list equipment that I have to buy for my business (ex. Camera equipment / Drone) and even examples of how many years of depreciation until it’s $0

[@AvalonAccounting]

Yea it's not super clear on there. We'll get to work on a better resource! The link below shows common CCA classes and what goes into them. CCA is most often calculated on a declining balance method at a given percentage instead of over a number of years. A lot of the time if you can't find the specific direction to include in a given class, the asset may fall into class 8. www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/classes-depreciable-property.html Thanks again for your comments :)

[@RyanThomasWoods]

@@AvalonAccounting if you could create a better resource that would be greatly appreciated! I also have that link bookmarked and know that many do fall into class 8. The issue again is no examples on how long it takes to depreciate an expense… if I keep deducting 20% every year it still doesn’t reach 0… the CRA doesn’t give clear examples or definition on when the remaining amount of an expense can be 100% written off. (Ex. Year 1: $600 item, 20% deduction ($120 can be written off), leaving $480 for year 2, 20% deduction ($96 can be written off), leaving $384 for year 3, 20% deduction ($76.80 be written off), leaving $307.20 for year 4… Sometimes by year 4 the item in class 8 no longer works and I had to buy a new replacement… so at what point or year can the remaining amount be 100% deducted? I guess that’s the 2 things about CCA that is unclear. 1) By what year can expenses finally reach $0 and no longer be depreciated (as given in the example above it’s going to take many many years to get it to $0) and 2) what happens if the item you are depreciating no longer works and you had to buy a 2nd one… can you write off the remaining $ of the broken one and start deprecating the new one?

[@AvalonAccounting]

Yea it's a bit of a strange one. I've got a couple of notes for you now and I'll add those topics to the explainer when we film it. 1. CCA is really only for tax purposes (calculated and tracked in your tax return). If you want to depreciate your equipment for accounting purposes using another method, that's ok. For accounting purposes you could use whatever makes the most sense for the equipment (5 years straight line for example). 2. For declining balance you'll never hit a $0 balance unless you sell or scrap the equipment. 3. For CCA purposes, equipment is added to a class and the amount is grouped in with other assets in that class. 4. When you sell or scrap a piece of equipment, you could have "recapture" which is treated as income. Or you could have a terminal loss which is a deduction. These only occur if the given CCA class is empty. Recapture info here: www.taxtips.ca/glossary/recapture.htm Terminal loss info here: www.taxtips.ca/smallbusiness/terminal-loss.htm More examples here: www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/real-estate-depreciable-property-other-properties/example-calculation-recapture-terminal-loss.html The good news is that you only need to worry about CCA on a tax return as compared to depreciation which is for accounting purposes. The tax software will typically calculate the allowable tax deduction for you.

[@sirbuddyli]

Great video Joe! BTW, do you know if the GST Input Tax Credits have to be added back to corporate income and are taxable for T2?

[@sandrab8553]

Excellent explainer, thank you!

[@josephinebardot8403]

Thank you a lot for this video. This is very interesting and informative. Keep posting like those amazing videos, this is awesome.

[@AvalonAccounting]

Thanks Josephine! Love the feedback and we will definitely keep posting videos :)

[@RayaFlora]

Thanks for sharing this marvelous post. I'm very pleased to read this article. I enjoy this site - it's so useful and helpful.

[@moisesordonia1272]

thank You

[@drd4059]

There is an underlying assumption that the company stays in Canada. My company earns IP royalties with the largest revenues coming from the largest economies. Long term, I expect only 3% of revenue to come from Canada. It doesn't make sense to bring revenue from a lower tax jurisdiction to a high tax jurisdiction and pay at tax at a higher rate. How about the option of shifting the corporate structure to a lower tax jurisdiction and just paying tax where the revenue is earned?