Canadian Tax Advantages for Small Business Owners

Time and again, FranNet of Canada has extolled the virtues of becoming your own boss by using franchising as the means to establish business ownership. Need a quick review? With franchising, you get the training and support of the franchise brand backing your effort. There’s much more freedom and flexibility in your schedule – allowing for a better work-life balance. And, as a business owner, you’ll finally have full control of your income-generating capability. But these attributes aren’t the only benefits you can take advantage of as a franchisee. As it turns out, there are also several tax benefits available to the self-employed.


Let’s review some of the strategies available to self-employed franchise owners in Canada, allowing you to lower your tax liabilities.


Family Business = Split Income

Canadian taxpayers who are self-employed have a unique advantage over traditional employees who work for others. You’re allowed to employ others in your family, then compensate them with a tax-deductible wage. The deduction works just like any other qualified business expense. There are pre-conditions, however. The salary must be paid directly to a spouse or child, and the work they’re compensated for must be aligned with earning income related to the business. And the salary level must be commensurate with a reasonable wage rate for the position and duties. When you prepare to file taxes, their salary and earnings should be reported on a T-4 slip, just as any other employee.


Incorporating Has its Advantages

As a franchise owner, when you incorporate your business, you’re allowed to split income with the corporation. Because when a corporation generates income, business owners are only liable for paying personal tax on revenues paid out personally. This may take the form of a salary (as an employee) or, in the case of paying a dividend (as a shareholder). What remains of business income in the corporation is subject only to a corporate tax – provided no funds were withdrawn for personal use. In Canada, small business income tax rate for incorporated entities can be anywhere from 10 to 12.2%, which varies depending on the territory or province. By splitting income with the corporation, owners can defer as much as 40% on income. Subsequently, the after-tax income can then be reinvested back into the business or invested – provided it’s a corporate investment account.


TOSI Updates

Business owners used to be able to split income with family members (adults) through the payment of dividends from corporate-owned shares. But in 2018, new regulations affected the tax on split income (or TOSI). Yet, one exception remains. For family members who work for the business work a minimum of 20 hours per week, and own corporate shares, they can be paid dividends that are taxed without the updated TOSI rules.


If you’ve considered establishing a business of your own through franchising, and there are plenty of concepts to choose from, you should keep in mind that many advantages await you – some in places you may not have considered. As with any tax-related issue, you should always verify your financial plans and tax liabilities with a certified accountant. While the aforementioned strategies can be beneficial to your bottom line, you should always remain in full compliance with all Canadian tax rules and regulations.


Let’s Chat!

2022 has begun to wind down to the finish line, so if you’re ready to begin your entrepreneurial journey before the year is out, FranNet of Canada can help you get started. With consultants serving every Canadian province, you can set up a no-cost, no-obligation appointment with one of our qualified representatives. To find your local province consultant, simply follow this link and select “Canada” on the FranNet Franchise Consultant Directory page of our website. Getting started is easy – you can take our FranNet Ownership Quiz – or simply make an appointment to speak with one of our franchise experts today. And don’t forget to read our bi-monthly blog series, covering franchising issues for all Canadian entrepreneurs!

Oct 28, 2022