It can be difficult to run a business on your own in Canada let alone with your family. Like any business, running a family business in Canada has its rewards and challenges. But a lot of Canadians make it work. In fact, 80% of all Canadian businesses are family-owned and contribute 60% of Canada’s annual gross domestic product (GDP).
Big or small, there are many benefits to running a family business in Canada. Here are 3 family business tax facts that could save your family-owned business money when you file your annual tax returns.
Splitting business income with family members is a great way to reduce your family business tax. Income splitting shifts income from one family member paying a higher rate of tax to another taxpayer within the family paying tax at a lower rate.
If you hire a spouse, partner, or child, the company can deduct the amount it pays them as an expense. Moreover, the family members pay tax at their own personal income tax rates, which are often substantially lower than the family member in the higher tax bracket.
If you can’t hire a family member to work for the family business, you can make them shareholders and pay them dividends, which are taxed at a reduced rate.
The business still needs to pay taxes on this money, but depending on the incomes of the family members and the provinces in which they live, there may be overall tax benefits.
Incorporating a Canadian family business can also result in significant tax advantages. If the business has grown in size and profitability, it might make sense to operate the business through a corporation.
Small Canadian family businesses are entitled to a low rate of tax on the first $500,000 of active business income—about 15%—but this number will vary by province (ranges from lowest of 10.5% in Manitoba to highest of 18.5% in Quebec).
Incorporating the family business can make a lot of sense if it allows you to leave some of the earnings in the corporation without paying it all out as salary or dividends.
Running a family business is like any business, but there are additional tax breaks that can help reduce the family business’s overall tax burden. The tax experts at FBC can help your Canadian family business find all the tax deductions it qualifies for.
Since 1952, FBC has been working exclusively with small, family-run businesses and agribusiness in Canada. Over the last 65 years, our understanding of Canada’s ever-changing tax law has helped Canadian businesses minimize their tax burden and maximize their assets.