9 Essential Tax-Saving Strategies Every Canadian Small Business Owner Should Know

Running one of Canada’s 1.22 million small and medium-sized businesses offers many rewards—you’re your own boss, you set your hours, and you work on something you’re passionate about. But beyond these perks, business owners also have unique opportunities to save on taxes.

Unfortunately, the daily demands of running a business often leave little time for focusing on tax strategies. That’s where Clear Wealth comes in. We’ve outlined nine essential tax-saving tips for small businesses, each designed to help you keep more of what you earn:

1. Employ Your Spouse and Children

Whether you operate as a sole proprietor or through a corporation, consider paying a salary to your spouse and children. Canada’s progressive tax system means higher income earners pay higher tax rates. By splitting income with family members in lower tax brackets, you can reduce your overall tax burden. Just ensure that the salary is reasonable for the work they do.

2. Incorporate Your Business

If your business is generating more profit than you need to live on, incorporation can be a powerful tax-saving tool. By qualifying for the lower small business tax rate on active income, you can achieve a significant tax deferral—especially if profits remain within the company. This strategy can lead to permanent tax savings if the business is eventually sold and the lifetime capital gains exemption applies. However, if your business incurs losses, incorporation may not be the best option as those losses would be trapped within the corporation.

3. Maximize RRSP Contributions

To maximize your registered retirement savings plan (RRSP) contribution next year, focus on maximizing reported earned income this year. If your business is incorporated, finding the right dividend/salary mix is crucial. Additionally, consider contributing to your tax-free savings account (TFSA) to balance your investment plan. If your business has passive income over $50,000 or active income exceeding the small business limit, an Individual Pension Plan (IPP) could be an even more effective way to shelter income.

4. Prepare for the Sale of Your Business

Planning your exit strategy early is key. If you plan to sell your business, check with your accountant to ensure eligibility for the lifetime capital gains exemption and understand the necessary steps to qualify.

5. Claim Your R&D Expenses

Research and development (R&D) expenses can result in substantial tax savings. Canada’s Scientific Research and Experimental Development (SR&ED) tax incentives allow you to claim these expenses as deductions or receive refundable or non-refundable tax credits. Depending on your business, these credits could offset up to 35% of your qualified R&D expenditures.

6. Take Advantage of Other Investment Tax Credits

Beyond R&D, other expenses may qualify for investment tax credits. These include investments in new buildings, machinery, and equipment in certain industries and regions of Canada, as well as expenses related to mining exploration or opening licensed childcare facilities for employees.

7. Claim Home Office Deductions

If you operate your business from home, you can claim a portion of your household expenses, such as rent or mortgage interest, property taxes, utilities, home insurance, and more. If you use your personal vehicle for work, those expenses may also be deductible.

8. Utilize the Apprenticeship Job Creation Tax Credit

If you employ apprentices, you can claim 10% of their salary as a tax credit, up to $2,000 per year, per apprentice. This credit applies to apprentices registered under a government apprenticeship program working in a prescribed trade during their first two years.

9. Invest Excess Cash Wisely

If you’re leaving profits in the company to defer personal taxes, consider a smart investment plan for those funds. This is especially beneficial for active business income eligible for the s