Did you know small & medium businesses make up 99.8% of all businesses in Canada? If you’re launching a new online business, chances are you’ll be far too busy competing with your rivals to consider how much of your profit is being eaten away by taxes at the end of each fiscal quarter. However, it’s essential to be aware of your tax benefits and responsibilities, as they are an unavoidable part of doing business.
Understanding the inner workings of your online business’s tax obligations will empower you to make informed financial decisions now and to save money in the long run. According to tax stats and studies, the average small online business pays a tax rate of nearly 20% across all industries.
Luckily, the Canada Revenue Agency offers plenty of small business tax deductions to provide much-needed relief. Here are some actionable tips and tax breaks to help you maximize your savings once your taxes become due.
Home Office Costs
Many online entrepreneurs are choosing to work from home in the times of COVID-19. This approach reduces office-related overhead costs, and it can provide you with an unexpected tax break.
You can write off your home office as a tax exemption by determining the square footage of your home office as a percentage of the square footage of your entire home.
Once you have done that, you can write off that same percentage of your rent or mortgage as a home office business expense and reduce your tax owed.
Utilities
You can claim your home office utilities as business expenses in the same way that you would claim the expense of renting your home office.
If your office occupies 25% of your home, for example, you can deduct 25% of your bills for utilities, repairs, maintenance, homeowner’s insurance, and homeowner’s association membership costs. You may even be able to deduct the costs of cleaning supplies and heating for your home office.
Business and Health Insurance Costs
Do you have insurance for your online business? If so, you can write off these insurance costs to give yourself a tax break. A portion of your home insurance could be tax deductible if you have a home office.
If you run a business in an industry that demands extra levels of malpractice or liability coverage, you can write off those insurance premiums as well.
Canadians can deduct their Private Health Insurance Premiums paid for themselves and their family members, as longas the business owner paying the tax is sufficiently self-employed.
Work and Travel Expenses
You can write off portions of most of what you spend travelling for work as business expenses. However, these deductions are usually only valid if you write them off for specific reasons.
You may be able to deduct a percentage of business-related food purchases, plane ticket costs, fuel, and other transport expenses from your taxable income. According to local tax codes, Canadians can deduct between 50% and 100% of their business-related meal and entertainment expenses.
Canadian tax authorities allow you to deduct your vehicle expenses for your small business. These expenses include fuel, parking, insurance, maintenance and repairs. If you have an entire fleet of vehicles in use for your business, you can deduct these costs for the entire fleet.
It’s important to note that you can only deduct your business-related costs if you use your personal vehicle for business needs. If you drive 8,000km and only 2,000km of that was for your business, you can claim 20% of your vehicle expenses back. It’s crucial to keep good records to give the CRA accurate estimates.
Inventory Costs
If you sell physical products online or in the real world, you can write off all of those inventory costs once the products have been sold. These savings can quickly accumulate, as the cost of inventory is often one of an online business’s largest overheads.
Remember, you only have to pay tax on the profits generated by your business and not on the overall revenue it brings in.
Do you accept cryptocurrency payments for your products? Remember to report those profits as taxable income too. You will need to pay federal income tax on any income realized through the exchange of cryptocurrencies like Bitcoin and Dogecoin for fiat currency or other assets.
Salaries and Freelance Costs
A significant percentage of small business owners hire freelancers to relieve some of their workloads while getting their businesses up and running. Many others have part-time or full-time employees on board. You can write these expenses off.
You can also deduct permanent employee salaries from your taxable income. Plus, you can claim Canada Pension Plan and Employment Insurance premiums for your staff members.
Marketing and R&D Expenses
Canadian taxpayers are liable to deduct the costs incurred for the marketing and advertising of their home businesses. Many online business owners aren’t aware of this and don’t take advantage of this tax break. But it can save you a fair portion of your taxes owed at the end of the year.
Speak to your local tax expert about how much you will be able to deduct for your advertising expenses. You may find that your business cards, promotional gifts, and advertisements come with hefty deductions.
Research and development are another area online entrepreneurs rarely recognize as being tax-deductible. However, resources like the CRA SR&ED program are designed to drive innovation and provide tax incentives.
Businesses that incur costs for effective R&D can claim tax reimbursements for a large percentage of the costs incurred, making it easier and faster to develop new products or services. This program offers entrepreneurs many advantages in the fast-moving tech sector, as innovation is essential in a highly competitive marketplace.
The Takeaway
Many modern online entrepreneurs simply don’t have the spare time to think about saving money on their taxes. They think they would be better off spending their time and resources scaling their businesses and acquiring new customers.
However, some forethought and a solid tax strategy can serve you greatly. With a little extra effort, you can improve your profit margins and minimize the tax you pay to the Canadian government each quarter.
Every online entrepreneur is always looking for ways to boost their profitability.
The tax breaks we mentioned above will certainly help.
About the author
Nina Sharpe is a content champion for various outlets, covering various business topics from finance for startups to small business accounting tips. If you’d like to reach out to her for content collaborations, send a message to nina@ninasharpe.me.
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