Canadian corporate tax deductions: How to minimize taxable income?

Businesses in Canada have access to several deductions and credits that can help corporations lower their taxes. In this article, we discuss the various deductions and credits available for Canadian corporations to reduce their taxable income.

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What Is Taxable Income?

Taxable income is the total amount of money that an individual or business earns in a year minus any deductions and credits for which they are eligible. This figure is used to determine how much tax needs to be paid.

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What Are Tax Credits and Deductions?

Taxpayers can reduce their taxable income by taking advantage of certain federal tax credits and deductions available in Canada. These include non-refundable tax credits such as investment tax credits and capital property write-offs.

Business owners should thoroughly research all available options when it comes to reducing their taxable income. By keeping a proactive approach to tax management, they can fulfill all their obligations while also taking advantage of many opportunities for savings. A qualified tax professional can provide valuable advice about current regulations and advise on strategies for lowering one’s effective tax rate.

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What Is The Difference Between Tax Deductions And Tax Credits?

A tax deduction reduces the amount of income subject to taxation while a tax credit directly reduces the amount of tax owed on an individual’s or company's total income. A taxpayer must itemize all deductions from their gross income during a month period to receive them, whereas with a credit they simply claim it at the end of the year.

It is important to remember that there are limits placed upon certain types of credits and deductions by both federal and provincial governments. By partnering with a qualified tax professional, taxpayers can ensure they're taking advantage of every possible reduction available.

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What Deductions Reduce Corporate Taxable Income In Canada?

Canadian resident corporations may be eligible for deductions and credits to reduce their federal income tax burden. Likewise, provinces and territories have their own rules regarding deductions to a company's income taxes. By taking advantage of the deductions and credits available to Canadians, it is possible to reduce overall taxable income while still adhering to all applicable laws and regulations set out by the CRA.

Advertising

Businesses can deduct expenses related to advertising in Canadian media, including newspapers, television, and radio stations. Certain restrictions apply depending on the amount of deductible expenses. For example, advertising produced by a foreign corporation or transmitted via digital platforms may not be eligible.

Bad debt

If a debt you're owed can't be recovered, then you may be able to deduct an amount for it. For this to happen, you must have determined that an account receivable is a bad debt within the year and the receivable must already be included in income.

Business start-up costs

While it can be complicated to determine what can be claimed as a start-up expense, new business owners may be able to claim certain costs associated with starting their company. To deduct business expenses, you must have a clear date on which your business was started. Moreover, you must specify whether expenses were made to get the business up and running or during the initial stages leading to normal operations. A tax professional can help you understand how to properly take advantage of these deductions.

Business tax, fees, licenses, and dues

All annual license fees and certain business taxes are deductible. Additionally, the annual dues or fees that must be paid to maintain a membership in a trade, commercial association, subscription, or publication are deductible. This doesn't include membership dues to organizations based around recreational activities such as dining or sport.

Capital cost allowance (CCA)

Property that loses its value over time, such as buildings or equipment, that are used for business purposes are eligible for a yearly deduction known as capital cost allowance.

Delivery, freight, and express

A business that incurs delivery, freight, and express costs is able to deduct these expenses.

Fuel costs (except for motor vehicles)

In Canada, you can deduct the cost of fuel, motor oil, and lubricants used for business purposes. However, gasoline, diesel, and propane costs are not deductible. In case the cost of fuel is related to home office expenses, it must be claimed as a business-use-of-home expense.

Insurance

All ordinary commercial insurance premiums incurred on building, machinery, and equipment are deductible. However, motor vehicles have to be claimed under another category.  

Interest and bank charges

If money is borrowed for business purposes or to acquire property for business purposes, then the interest incurred can be deducted.

Fees, penalties, or bonuses paid for a loan

Fees paid to reduce the interest rate on a loan can be deducted. Likewise, penalties and bonuses charged by a financial institution to pay off a loan before the due date are also deductible.

Fees deductible over five years

Certain fees incurred when getting a loan to buy or improve business property can be deducted over a period of five years.

These include fees related to:

• Application
• Appraisal
• Processing
• Insurance
• Loan guarantee
• Loan brokerage
• Finder's fees
• Legal fees related to financing

Fees deductible in the year incurred

Standby charges, guarantee fees, service fees, and similar fees can be deducted in full in the year they're incurred. This only applies if they apply only to that particular year.

Interest deductible on property no longer used for business purposes

Interest expenses for a property used for business purposes can be deducted even if the property is no longer used for such purposes.

Interest on loans made against insurance policies

Interest paid on a loan made against an insurance policy can be deducted. However, this only applies if the insurer didn't add the interest paid to the adjusted cost base of the insurance policy.

Capitalizing interest

A company may choose to capitalize interest on money borrowed to buy certain properties by adding the interest to the cost of the property. This applies to depreciable and resource property. In addition, exploration and development costs can also be used to capitalize interest.  

Interest related to workspace in your home

Interest related to business use of workspace in a person's home can be claimed as a business-use-of-home expense.

Legal, accounting, and other professional fees

Fees incurred in legal or professional accounting services can be deducted, including consulting fees. Likewise, the fees incurred when a tax professional prepares and files your income tax and GST/HST returns may also be deductible.

Maintenance and repairs

The cost of labor and materials for minor repairs or maintenance performed on property used to earn business income can be deducted.

However, the following can't be deducted:

• Costs for repairs that have been reimbursed by insurance
• Capital expenses (these must be claimed as a capital cost allowance)
• The value of a person's own labor

Management and administration fees

Bank charges and other management and administration fees incurred to operate a business can be deducted. These include processing payment charges.

Meals and entertainment

Under certain conditions, companies can claim 50% of expenses related to food, beverages, and entertainment. Entertainment expenses can include entrance fees to sporting events and room rentals such as hospitality suites.

Office expenses

The cost of small office items such as pens, pencils, paper clips, stationery, and stamps can be deducted. However, other items like calculators, filing cabinets, and desks count as capital items.

Prepaid expenses

Expenses paid ahead of time may be deductible under certain conditions.

Property taxes

Property taxes incurred for property acquired for business use are deductible. For instance, the property taxes for the land and building where a business is situated are eligible.

Rent

You can deduct rent for the land and buildings used for business purposes.

Salaries, wages, and benefits

Employers can deduct gross salaries and other benefits paid to employees.

Supplies

The cost of items necessary for a business to provide goods and services is deductible. For example, cleaning supplies that will be used by a plumber.

Telephone and utilities

Expenses for telephone, gas, oil, electricity, water, and cable incurred to earn income can be deducted.

Travel

Travel expenses incurred to earn business and professional income including public transportation fees, hotel accommodations, and meals can be deducted. Usually, the 50% limit to meals, beverages, and entertainment applies.

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What Federal Tax Credits Are Available In Canada?

Canadian companies that file a T2 return may be eligible to claim federal tax credits.

Air quality improvement tax credit

This credit equals 25% of eligible expenses related to the purchase or upgrade of HVAC systems. The purchase of HEPA devices also applies.

Canadian film or video production tax credit (CPTC)

This is a tax credit administered by the CRA in conjunction with the Department of Canadian Heritage. Eligible corporations get a refundable tax credit of 25% on qualified labour expenditures.

Canadian journalism labour tax credit

This refundable tax credit is available to corporations, trusts, and partnerships that are designated as Qualifying Journalism Organizations (QJO).

Federal foreign business income tax credit

To avoid double taxation, corporations that pay foreign tax income or profits from operating in a foreign country can claim this tax credit. This credit reduces the Part I tax that a corporation would have to have paid.

Federal foreign non-business income tax credit

Canadian residents who earn non-business income in a foreign country that has already taxed it can claim this credit. It also applies to authorized foreign banks. Foreign non-business income includes dividends, interest, and capital gains.

Federal logging tax credit

Corporations that pay logging tax to the province of Quebec or British Columbia are eligible to claim this credit.

Federal qualifying environmental trust (QET) tax credit

This credit applies to corporations that benefit under a qualifying environmental trust.

Film or video production services tax credit

To be eligible, the production must be certified by the Canadian Audio-Visual Certification Office. A company that acquires this tax credit will not be eligible for the CPTC and vice-versa.

Investment tax credits

Corporations earn ITCs by making certain investments. For instance, the Scientific Research and Experimental Development (SR&ED) tax credit is available to companies involved in research and development (R&D) activities.

Manufacturing and processing profits deduction (MPPD)

If a corporation derives 10% or more of its gross revenue for the year from manufacturing or processing goods in Canada it may claim the MPPD.

Return of fuel charge proceeds to farmers tax credit

Corporations that incur gross eligible farming expenses of $25,000 or more in the provinces of Ontario, Manitoba, Saskatchewan, and Alberta qualify for this tax credit.

Accounting Services

By making the best out of all the deductions and credits available to Canadian corporations, you can make sure your company pays as little tax as possible while still complying with the law. Professional accounting services can help businesses reduce their taxable income by ensuring that all deductions and credits are accurately applied to the company’s financial records.

At Stamped, we specialize in providing effective tax planning for companies of any size. By leveraging our unique combination of AI automation technology and assistance from expert accountants, businesses can file taxes quickly and accurately while taking advantage of every available deduction or credit. ‍