To encourage investment in Canada and help smaller companies thrive, Canada offers a number of tax incentive options specifically tailored to assist small and medium-sized companies. Many of the incentives are industry or location-specific, so they may not be an option for every company. However, given that Canadian tax incentives can save hundreds or even thousands of dollars in tax obligations, they are certainly worth reviewing to see if you qualify. To learn more about tax incentives for small and medium enterprises in Canada, contact an experienced Canadian tax attorney with Jeremy Scott Law by calling (902) 403-7201.
A General Overview of Canadian Tax Incentives
Tax incentives come in three general formats. While each category of incentive has value, they are calculated differently. The result can affect how useful each incentive may be.
- Tax Credit: A tax credit decreases the amount of tax owed to the federal government or providence dollar for dollar. Most credits for businesses are not refundable, so they only offset any tax owed.
- Tax Deduction: A tax deduction reduces a business’s taxable income, which then decreases the amount of tax owed. The actual dollar value will depend on the amount of the deduction and the applicable tax rate.
- Direct Tax Rate Reduction: In some cases, the applicable tax rate for the business is reduced if it meets certain qualifications.
Tax incentives in Canada are available at the federal, provincial, and territorial levels. As a result, some companies may have more or fewer incentives available to them depending on their location and where they do business. In addition, tax rates vary by location.
Common Tax Incentives for Canada Small and Medium Businesses in 2023
Not every company will be able to take advantage of all of the tax incentives listed below. However, these Canadian tax incentives can sometimes motivate companies to try out a new program that can lead to benefits for the company, their employees, and Canada as a whole.
Apprenticeship Job Creation Tax Credit (AJCTC)
The AJCTC is a tax credit that encourages employers to hire or train new apprentices. This is a non-refundable credit of up to $2,000 per year for each eligible apprentice. Eligible apprentices are in their first two years of being an apprentice in a prescribed trade, and their contract is registered with the governmental apprenticeship program.
According to the Canada Revenue Agency, the credit can carry forward for 20 years if it cannot be used in the year in which the expense was incurred. The AJCTC can also carry back three years. Employers claim the credit on their annual income tax return.
Decreased Tax Rates for Small Business
The general corporate tax rate in Canada is technically 38%. However, once companies consider the federal tax abatement and general tax reduction, the Canada Revenue Agency (CRA) recognizes that the applicable tax rate for corporations is 15%.
Some companies that qualify as small businesses can receive a further tax benefit—their effective rate is only 9%. In addition, most provinces or territories have a lower tax rate for small businesses up to a certain dollar limit of income. Yukon and Saskatchewan, for example, have a 0% tax rate for small businesses up to their income caps.
Scientific Research and Development Tax Credit
Although some business owners may assume that research and development (R&D) is only something that larger companies do, that is not necessarily the case. Companies of all sizes engage in R&D, and in Canada, companies can receive a federal tax credit and often a provincial tax credit for R&D expenses.
For corporations, that figure can be large—up to 35% of qualified expenses. To qualify for the credit, the CRA has two major requirements. The work must:
- Be conducted to advance scientific knowledge or technological advancement and
- Involve a systematic investigation or search that is carried out through experimentation or analysis
The research or development must be about more than just a product or service; it should involve the discovery of new knowledge that advances science or technology. The “how” requirement also generally involves the use of the scientific method to develop the knowledge.
Small Supplier Rule for Sales Tax
Some small businesses that qualify as a “small supplier” do not have to collect Goods and Services Tax (GST). Businesses also do not have to collect GST if they sell only exempt supplies (companies can find out more about what an exempt supply is by reviewing the CRA’s Exempt Supplies list).
According to the CRA, a business may qualify as a small supplier if it has revenue of less than $30,000 per quarter over the last four consecutive calendar quarters. Public service bodies have a higher limit of $50,000 per quarter. Calculating whether a company is a small supplier can be somewhat complicated, so you may want to contact Jeremy Scott Law to learn more about this calculation.
Investment Tax Credit
To encourage investment in Canada, the Investment Tax Credit is available to businesses that have acquired qualifying real estate, machinery, or equipment in certain areas of Canada. The investment tax credit might also be available if the company created licensed childcare spaces for their employees or invested in certain types of mining operations. The amount of the credit varies based on the rationale for the credit and the expenses incurred.
Charitable Donations Deduction
Canada offers a generous tax deduction for donations to qualifying charities. Small businesses can donate up to 75% of their income and still claim all of that donation as a deduction to their net income. Individuals and businesses can donate both funds and in-kind items and still claim the deduction.
Ontario Small Business Deduction
Specific provinces might also have small business tax benefits as well. As an example, Ontario offers a small business tax deduction for private corporations. The Ontario basic income tax is currently 11.5%. However, the small business tax deduction is 8.3%, which makes the applicable tax rate just 3.2% for qualifying small businesses.
Take Advantage of Tax Benefits for Small and Mid-Sized Businesses
As a Canadian tax lawyer, Jeremy Scott Law may be able to help you review your financials and business operations to determine if you are eligible for additional tax benefits. Learn more about how an experienced Canadian tax attorney can help businesses discover applicable Canadian tax incentives by calling (902) 403-7201.