Your Taxes Are a Roadmap to Where Your Business is Headed
The act of filing our taxes is often combined with a swift sigh of relief. The return you worked so hard to complete is immediately filed away in the very back of your mind where it will likely be forgotten about until next year.
But that document contains much more than just facts and figures for the Canadian Revenue Agency. For small business owners, it contains a secret roadmap—one that leads to the next chapter of your business.
According to a recent survey, many Canadian entrepreneurs are unsure how the structure of their business—whether it is registered as a sole proprietorship or corporation—affects their taxes, despite the fact that it can result in highly varied tax savings. And, unfortunately, many small business owners are leaving money on the table because of it.
Understanding the difference between a sole proprietorship and a corporation can make a world of difference when it comes to your personal finances and tax savings over time.
Rest Stop No. 1—Sole Proprietorship
The most common business structure is that of a proprietor—someone who operates their business as an extension of themselves, and generally has personal ownership of all assets involved in the business. Proprietors are taxed on a calendar year basis for their income earned in total, regardless of whether they enjoyed access to those funds or not.
When it comes to tax time, proprietors are subject to CPP premium payments (both the employer and employee portions), and may opt into paying EI premiums. Proprietors may also deduct a portion of their personal expenses used to support their business on their tax return to help lower taxes.
But if you found yourself in a higher tax bracket this year, or noticed your books could have benefited from a more flexible financial year, your tax return may be pointing to signs of your next business rest stop—incorporating.
Rest Stop No. 2—Corporation
With a corporation, assets and profits are not yours; they belong to the corporation. That means you are taxed when you pay yourself and you’ll be given a tax credit to reflect the taxes on the income the corporation has already paid.
This allows you to manage how you receive your compensation, and defer income half-taxed in the corporation for use in the development of your business. You can also pay yourself with dividends, which does not attract CPP payments, allowing you to reinvest in your company.
Should you decide to incorporate, your taxes will get a little more complicated. Returns for corporations are independent of their owner, which means you’ll file two returns, and they generally need an accountant’s touch. But a corporate structure can give you more flexibility and the opportunity to do better tax and succession planning than that of a proprietary.
When navigating the roadmap laid out by your taxes, remember that your business structure should reflect the long-term strategy of your business.
If last year’s financial results left you questioning that strategy, the Blue Sky team is here to help. We’ll get you set off in the right direction. Call us today: 289-466-5210.