Effective tax planning can significantly impact your business’s profitability. Here’s a practical summary of essential tax-saving strategies specifically tailored for small businesses operating in Ontario in 2025:
1. Utilize the Small Business Deduction (For Incorporated Businesses)
Benefit from the low combined federal and Ontario small business corporate tax rate (~12.2%) on your first $500,000 of active business income.
Monitor passive income closely—if investment income exceeds $50,000 annually, you risk reducing your small business deduction limit.
2. Optimize Owner Compensation: Salary vs. Dividends
Salary:
Deductible for the corporation.
Contributes to CPP, building retirement income.
Generates RRSP contribution room.
Dividends:
Usually taxed at a lower personal rate.
No CPP deductions, preserving immediate cash flow.
Does not create RRSP contribution room.
A balanced combination of salary and dividends often yields optimal tax efficiency.
3. Income Splitting Within Family (Complying with TOSI Rules)
Pay family members reasonable wages for genuine services rendered to your business.
Issue dividends to family members who are actively involved (minimum 20 hours per week or significant involvement historically), or if you're 65+ paying your spouse.
Ensure compliance and document clearly to avoid penalties.
4. Maximize Eligible Business Expense Deductions
Deduct all legitimate business expenses, including:
Office rent and utilities.
Salaries and wages (including family members).
Vehicle expenses (with clear business-use records).
Advertising, marketing, travel, and meal expenses (remember the 50% meals deduction rule).
Keep comprehensive records to support all deductions and ensure clear separation of business vs. personal expenses.
5. Leverage Capital Cost Allowance (CCA) & Accelerated Investment Incentive
Accelerated CCA allows a larger first-year depreciation deduction for assets acquired in 2025.
Plan asset purchases carefully—equipment, vehicles, and technology—to capitalize on immediate tax savings.
6. Claim GST/HST Input Tax Credits
Register for GST/HST if annual revenue exceeds $30,000.
Recover GST/HST on business expenses to improve cash flow.
Keep accurate records of GST/HST paid to ensure full credit.
7. Retirement Planning: RRSPs and IPPs
Regularly contribute to RRSPs, which provide immediate personal tax deductions and deferred growth.
Owners of incorporated businesses aged 40+ with higher incomes should consider Individual Pension Plans (IPPs) for significantly greater retirement contributions and corporate deductions.
8. Use Shareholder Loans Wisely
Clearly document shareholder loans to and from the corporation.
Repay any amounts borrowed from the company within the required timelines (by the following fiscal year-end) to avoid adverse tax consequences.
9. Plan for the Lifetime Capital Gains Exemption (LCGE)
Utilize the increased $1.25 million LCGE available on qualifying small business shares.
Ensure your business remains eligible by maintaining primarily active business assets and proper ownership structure for at least two years before sale.
10. Manage Tax Instalment Payments
Budget for quarterly personal, corporate, and GST/HST instalments to avoid interest charges and improve cash flow predictability.
Set reminders to avoid missing deadlines and incurring penalties.
Final Thoughts:
Effective tax planning not only reduces taxable income but enhances your business’s cash flow and growth potential. Regularly consult with your accountant to navigate changing tax legislation and optimize your business’s financial strategy.
For personalized accounting and tax assistance tailored specifically to your needs, reach out to our team at Freeman & Lourenco LLP. Proudly serving small businesses in Oshawa, Whitby, Ajax, and the entire Durham Region for over 40 years, we're here to support your business's growth and financial health.
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