Income Tax Deductions for Canadian Small Businesses

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How Many of These Tax Deductions for Canadian Small Businesses Have You Missed?

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Running a business in Canada gives you a whole new world of potential tax deductions that you can use to reduce the amount of income tax you have to pay at the end of the tax year or even, perhaps, to get a tax refund.

But are you truly getting to benefit from all the tax deductions you could be writing off against your business income? Here are eight income tax deductions that many Canadian small business owners overlook.

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Home Business Tax Deductions

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Home Business Front. Image (c) Dave McLeod/ Susan Ward

Most Canadian small business owners are aware of the Home Business Tax Deduction I think. But many do not seem to be aware of the extent of tax deductions they can claim by operating a home-based business, which range from the interest on your mortgage, if you're carrying one on your home, through a portion of the cost of cleaning materials as 6 Home Based Business Tax Deductions You Don't Want to Miss explains.

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Scientific Research and Experimental Development Tax Credits

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Image (c) Dave McLeod/ Susan Ward

Many Canadian small businesses don't realize that you don't have to have a big business or even an incorporated business to carry on, and claim tax credits for, SR&ED – sole proprietorships and partnerships are just as eligible. And the great thing about the SR&ED tax credit program is that the tax credit is refundable, so even if your business doesn’t make any profit, you will get the refund back in cash. Read Don't Miss Out on the SR&ED Tax Credit Program to learn more about how your small business could get involved.

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Allowable Reserves as an Income Tax Deduction

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You can deduct an amount for a reserve, contingent account, or a sinking fund as long as the Income Tax Act allows it and the amount is reasonable," says the Canada Revenue Agency's Business and Professional Income Guide. Generally, the amount you place in reserve has to be returned to your income the following year, although you could start/claim a new reserve that year. The Guide lists several CRA publications where you can read more about creating and using allowable reserves, including Interpretation Bulletin IT-154R, Special Reserves.

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Investment Tax Credits

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Are you aware that there are Investment Tax Credits (ITCs) for Canadian businesses that will let you subtract the cost of some types of property your small business acquired or some of the expenditures your small business incurred right off the top of the taxes you owe?

Sure, there are eligibility rules and some of the ITCs available only apply to businesses located in particular places, but if your business qualifies, they can be a real tax break. Investment Tax Credits for Canadian Small Businesses provides more details.

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Private Health Services Plan Premiums as Income Tax Deductions

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You can deduct the Private Health Services Plan (PHSP) Premiums you pay to insure yourself or any member of your household as long as you are sufficiently self-employed. That means that:

  • your net income from self-employment (excluding losses and PHSP deductions) for the current or previous year is more than 50% of your total income; or
  • your income from sources other than self-employment is $10,000 or less for the current or previous year;
  • you are actively engaged in your business on a regular and continuous basis, individually or as a partner.

Chapter 3 of the Canada Revenue Agency’s Business and Professional Income Guide explains how to calculate your income to be sure you qualify for this tax deduction.

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Hiring Your Spouse or Child Will Give You a Tax Deduction

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Maybe now's the Time to Hire Employees.

Whenever you hire someone, the cost of the employee's wages is a business expense. The same is true even when your new employee is your spouse or child. The difference is that hiring your own spouse or child also gives you the chance to do some income splitting. By employing your spouse or child in your business, you may be able to drop your net income into a lower tax bracket, netting a nice income tax deduction. Learn more by reading Pay Less Canadian Income Tax With Income Splitting.

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Apprenticeship Job Creation Tax Credit

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Image (c) Monty Rakusen/ Getty Images

If your business hires tradespeople, you can get an Investment Tax Credit of up to $2,000 for hiring an apprentice who is working in the first two years of his or her apprenticeship program.

You can take on an apprentice as a sole proprietor, too. The Apprenticeship Job Creation Tax Credit is a great chance to get some skilled help working for you at a reduced rate.

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Investment Tax Credit for Child Care Spaces

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If you don't operate a child care services business, your business can claim a non-refundable investment tax credit of $10,000 per child care space or 25% of the eligible expenditure for every new child care space your business creates in a licensed child care facility your business operates for the benefit of the children of your employees. Child Care Tax Credits provides more information.

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And These Are Just the Overlooked Tax Deductions

Remember, the tax deductions on these pages are just the ones that many small business owners overlook, either because they didn't realize the tax deduction might apply to their business or because they didn’t know they could do that.

There are many other income tax deductions available to small businesses in Canada that you can read about in these articles:

All potential tax deductions are worth checking out yourself and/or discussing with your accountant – which is also a tax deduction!