Understanding and utilizing effective tax-saving strategies can have a profound impact on your financial stress and overall success.
Effective tax planning is not only a smart way to reduce your tax liability, but also plays a big role in maximizing your profitability.
Below, we explore tax-saving methods if you’re part of the self-employed workforce in Canada.
Maximize Your Deductions
The first step to reducing your tax burden is understanding what business expenses you can claim.
Self-employed individuals can deduct a range of business expenses, including home office costs, vehicle expenses (for business use), equipment, supplies, advertising, maintenance, and repair, insurance costs, professional fees, and travel expenses.
However, if you’re moving forward with these deductions, make sure to keep accurate records and receipts to substantiate your claims. You’ll always need to be able to provide proof in case of an audit by the Canada Revenue Agency (CRA).
Utilize Business Use-of-Home Deductions
Many of those who are self-employed choose to work from home.
If this is you, then be aware that the CRA allows for the deduction of expenses related to the business use of a home, such as a portion of your rent or mortgage, property taxes, insurance, utilities, and maintenance.
The amount you can deduct is proportional to the space used for business purposes.
Split Income Where Possible
Income splitting can be a beneficial strategy for self-employed individuals that have a spouse or common-law partner with a lower income.
By hiring your spouse or partner to do legitimate work for your business, you may be able to lower your overall tax burden by distributing income across lower tax brackets.
Consider Incorporation
Incorporation can offer tax savings by lowering the overall tax rate on business income.
Corporations in Canada benefit from a lower tax rate compared to personal income tax rates, especially on the first $500,000 of business income due to the small business deduction.
However, there are costs and additional administrative duties associated with incorporation, so getting professional advice is important to determine if this move is the right one for you.
Invest in a Tax-Free Savings Account (TFSA)
A TFSA can be an excellent way for you to save money without paying taxes on the investment gains.
Although contributions to a TFSA are not tax-deductible, the income earned within the account is tax-free, even when withdrawn.
Contribute to a Registered Retirement Savings Plan (RRSP)
Contributions to an RRSP can be a significant tax-saving tool for the self-employed.
Contributions reduce your taxable income, potentially placing you in a lower tax bracket, while earnings in the RRSP grow tax-free until withdrawn.
What’s more is that you can tailor your RRSP contributions based on your business’s success each year.
Make Use of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credits
If you collect GST/HST on goods and services, you may be eligible for input tax credits to recover the GST/HST paid on business purchases.
This can significantly lower your net GST/HST payment to the government and reduce your overall tax expense.
Hire a Professional
One of the most effective tax saving strategies is to work with a professional accountant or tax advisor.
Tax laws are complex and ever-changing, and remaining vigilant about tax changes and credits is crucial.
An advisor can offer personalized advice and strategies to optimize tax savings based on your unique situation.
Need Tax Advice? We Can Help
If you’re self-employed, you have many opportunities to reduce your tax liabilities through careful planning and strategic decision-making.
Implementing these tax-saving strategies requires a good understanding of tax laws, meticulous record-keeping, and in some cases, professional assistance.
At Isaac Achal Professional Corporation, our Chartered Professional Accountants help you to take proactive steps towards safeguarding your hard-earned money and ensuring a more secure financial future. Contact us today to schedule a consultation and experience the difference for yourself.
