I’ve been self-employed for many years of my working life. One of the best things about being self-employed is that you can choose which 18 hours each day that you work. One of the drawbacks is that I never believe myself when I call in sick.
Self-employed folks also enjoy the benefit of being able to deduct almost any costs incurred while earning income from the business – as long as the costs are reasonable and legal. As year-end approaches, consider these ideas to save more tax for 2024 if you’re self-employed.
1. Consider incorporating. If you’re operating as a sole proprietor you might want to consider setting up a corporation to carry on your business. This makes sense if you’re concerned about legal liability; a corporation can provide protection against legal claims arising from your business. As for taxes, the first $500,000 of active business income ($600,000 in Saskatchewan) is eligible for a reduced rate of tax of about 11.5 per cent – the average across Canada – thanks to the small-business deduction. If you’re able to leave some of your earnings in the company without taking it out to spend personally, you’ll gain the benefit of deferring the personal tax that will eventually be paid when this income is distributed to you. So, consider setting up a corporation before year-end to gain these benefits going forward.
2. Decide on salary or dividends. If you have a corporation you can compensate yourself in different ways – most commonly through salary or dividends. Which is best? Salary provides RRSP contribution room, CPP benefits and a deduction for your company. Dividends can result in lower taxes personally and a refund of taxes to your corporation, and don’t generally require withholding tax to be paid. Having said this, you might want to leave some money in your corporation to defer tax on those dollars longer. In the end, advice from your accountant will be important.
3. Split income with family members. If you have any children, or your spouse, that work in your business, you can pay them reasonable salary or wages. These amounts are deductible to your business, and can potentially face less tax in their hands than yours. Consider accruing bonuses for 2024 to save tax this year. There may also be opportunities to split income by paying dividends to your spouse or kids, but the rules are complex and you have to watch for the “tax on split income” (TOSI) rules which can affect your decision to do this. Talk to a tax pro about it.
4. Buy eligible assets before year-end. If you operate as a proprietorship or partnership you can buy up to $1.5-million of eligible assets this year and deduct the cost immediately. The assets purchased must be available for use by the end of this year to qualify. This measure is temporary and won’t apply after this year. Even aside from the immediate expensing opportunity, it can make sense to purchase new assets by your fiscal year-end in order to claim capital cost allowance (depreciation for tax purposes) sooner.
5. Determine whether to pay EI. If your business is incorporated and you own more than 40 per cent of the shares of the company, you can’t claim regular employment insurance (EI) benefits. So, if you’ve been paying EI premiums in this situation, you may be entitled to a refund of premiums paid by filing Form PD24; you’ve got to file this form no later than three years from the end of the year in which you overpaid the EI premiums (That means you may be able to recover overpayments made in 2021 or later if you file by Dec. 31, 2024). Even if you don’t qualify for regular EI benefits, you can opt-in to the EI program to become eligible to claim maternity, parental, sickness, or compassionate care benefits (there are some exceptions in Quebec).
6. Consider the Saskatchewan pension plan. If you’re self-employed and don’t have a pension plan, you might consider joining the Saskatchewan Pension Plan (SPP). It’s similar to a defined contribution pension plan and any Canadian resident, regardless of where they live, can participate to the plan. Members can contribute up to $31,560 in 2024 (your actual contribution limit will depend on your RRSP contribution limit). You can also transfer to the pension plan assets from your RRSP, RRIF or unlocked registered pension plan, with no dollar limit. Check it out at www.saskpension.com.
7. Make tax-free withdrawals. Some amounts paid to you by your corporation will be tax-free, and can reduce personal taxes for 2024. I’m thinking of shareholder loan repayments (amounts your company owes to you), capital dividends or withdrawing paid-up capital (generally the amount you paid for your shares in your company). Speak to a tax pro about these opportunities.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.