Now that quarterly gst filing is over, and your records are all reconciled and adjusted up to Sep 30th, it's the perfect time for small business owners to do an estimate on what their tax burden will be for 2024.
Why, though? Is it just another payment to be made to your accountant?
When I first started in bookkeeping and taxes, I thought it seemed odd to want to know in November what you'll be owing next year. It's kind of like a pre-nightmare to stress you out until the payment day rolls around. Wow, was I ever wrong.
Whether you are a sole proprietar or a small corporation, tax planning is something you should have in your arsenal. I really don't like giving money to the government and I like it less for my clients. Here is a shirt list on what tax planning can do for you:
1. Income splitting. If you have a spouse or family member and they help with your business, you can pay them a reasonable (market rate) wage to lower your net profit. It's best to use this tactic with low income earners so that their tax burden isn't increased. As a small corporation, you can add your spouse or family members over 19 as shareholders, and they can receive dividends.
2. Asset management. Assets are those long-lasting items that we purchase for business use. Most often, you will find computers, office furniture, and vehicles in this category. Planning here will help with what you will depreciate, sell old assets, or purchase new ones. It's the best time to look at what is happening so that you are not surprised by a recapture of depreciation, or miss out on the immediate dispensing or acceleration in a year with the income to match! Planning like this can help match your big purchases to your best years of income. Lowering your overall taxes to your advantage.
3.Salary or dividends. Now, caution on this as the CRA does want to have matching withdrawals to salaries. This means that if you pay out $20,000 as a bonus, there should be a corresponding $20,000 withdrawal from your account.
On that note, planning whether you take salary or dividends can make a big difference for what your taxes will be. There are many factors to think about: did you make money? Do you have other sources of income? If you are sitting at a net loss, and take a salary on top of this it will increase your loss, but if you are at a net loss, you are not required to pay out dividends that year.
4. Financial planning:
Taking off from the last item, this is a good time to look at what salary/dividends may be next year. Also, you can see if you have been doing well, an increase year over year may indicate you could be withdrawing more from the company and would require advanced notice of this as it would increase the tax burden.
Conclusion:
These four items are just a drop on the bucket for what tax planning can do for you as a small business owner. Sole proprietors and small corporation should always have their tax planning done.