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If you’ve started a business and you’re trying to understand what this means for your taxes, you’re definitely in the right place. Let’s start with the basics first:
1. What are tax credits?
Tax credits are amounts that reduce the tax you pay on your taxable income. The more tax credits that apply to your business, the more you can reduce your corporate income tax. The federal, provincial and territorial governments each provide tax credits, which you can use to lower your taxes.
2. What’s the difference between a tax credit and a tax deduction?
A tax deduction reduces your taxable income. Operating expenses are a good example, as they allow business owners to deduct any reasonable expense they incur to earn income, including any GST/HST paid on that expense. This includes things like advertising costs, bad debts or insurance, as well as commonly claimed meals and entertainment expenses. If you own a business, get to know the list of eligible expenses, you might find some new ones your business is eligible for.
Did you know that you can deduct interest paid on money borrowed for business purposes?
A tax credit on the other hand, reduces the amount of tax you pay on your taxable income. A tax credit can be either refundable or non-refundable, but there are also broad categories of tax credits, meant to help with different parts of running your business. Here are a few examples:
3. Types of tax credits in Canada
Refundable tax credits
A refundable tax credit usually results in money coming back to your business in the form of a refund if the tax credit is more than the total amount of tax your business owes.
Non-refundable tax credits
A non-refundable tax credit does not result in a refund, it can simply reduce the amount of taxes you owe.
Investment tax credits
Investment Tax Credits like Newfoundland and Labrador’s Direct Equity Tax Credit, provides tax incentives directly to investors. This is one way that the government can stimulate more investments in a certain region. If you are looking for investors in your business, it might be helpful to know which incentives would apply to your industry or region, since it might help your business case and secure the investment.
Looking for investors? Negotiate from a position of strength by knowing which tax credits could be available to your potential investors.
Labour tax credits
Labour tax credits like the Film or Video Production Services Tax Credit allow for a certain percentage of a salary to be tax-free. This is one way the government will help businesses looking to employ Canadians in Canada. If you are scouting a location for a new business or looking for Canadian talent in certain fields, knowing which labour credits are available can help you make smart HR decisions.
Research & Development tax credits
Research and Development (R&D) tax credits allow businesses to deduct R&D expenditures from business income, provide an investment tax credit or lower your personal income tax bill. It’s one way the government is encouraging Canadian companies to innovate. The Scientific Research and Experimental Development (SR&ED) tax credit is a popular choice, and it’s available to all businesses in all sectors but you can find plenty of R&D tax credits on our business benefits finder.
Tax holidays like Quebec’s Tax Holiday for Foreign Experts allow businesses to reduce their taxes based on certain salaries. Other programs like the Aerospace Tax Holiday allow businesses to take a complete break from paying taxes for a period of time. It’s one way that the government encourages economic activity and growth. Knowing which business activities could improve or eliminate portions of your tax bill, might help you to make informed decisions as you map out your 5-year-plan.