Taxes are an inevitable part of running a business, but with proper planning and strategies, corporations in Canada can optimize their tax liabilities and improve their bottom line. This guide outlines practical steps and opportunities for Canadian corporations to save on taxes while staying compliant with the Canada Revenue Agency (CRA).
One of the first steps to tax efficiency is incorporating your business. Incorporation allows businesses to benefit from the Small Business Deduction (SBD), which lowers the federal tax rate on the first $500,000 of active business income. As of 2025, the combined federal and provincial tax rates for small businesses can be significantly lower than personal income tax rates.
Lower tax rates on active business income.
Owners of corporations have the flexibility to pay themselves through salaries, dividends, or a combination of both. Each option has its own tax implications:
Salaries are deductible expenses for the corporation and reduce taxable income. They also contribute to personal CPP (Canada Pension Plan) benefits.
Dividends are taxed at a lower rate than salaries but do not generate CPP contributions.
Work with a tax professional to determine the optimal mix based on your income level and financial goals.
Canada offers several tax credits that corporations can use to reduce their tax liability:
This program provides refundable and non-refundable tax credits for eligible R&D activities.
Certain provinces, like Ontario and British Columbia, offer tax credits for digital media and software development activities.
Eligible investments in specific sectors may qualify for ITCs, reducing the amount of tax owed.
Ensure that you’re claiming all eligible business expenses to reduce taxable income. Common deductible expenses include:
Office rent and utilities.
Employee salaries and benefits.
Advertising and marketing costs.
Vehicle expenses (if used for business purposes).
Professional fees (e.g., legal and accounting).
Maintain detailed and organized records to substantiate your claims during a CRA audit.
If family members are involved in the business, you may be able to split income by paying them a reasonable salary. This shifts income to family members in lower tax brackets, reducing overall tax liability.
Ensure that salaries paid to family members are justifiable based on their work to avoid scrutiny from the CRA.
Deferring taxes can improve cash flow. Strategies include:
Retaining earnings within the corporation instead of paying them out immediately as dividends or salaries.
Timing expenses and income to align with the most advantageous tax year.
If your corporation’s income is higher than usual in one year, consider accelerating expenses or deferring income to a lower-income year.
A holding company can help defer taxes and protect assets. Profits from an operating company can be transferred to a holding company, where they may benefit from tax deferral and creditor protection.
Delays taxation on passive income and shields assets from business risks.
Depreciate the value of business assets over time to claim deductions through the CCA. For instance, vehicles, equipment, and property can be written off over several years.
Take advantage of the Accelerated Investment Incentive, which allows faster depreciation in the first year of acquiring certain assets.
Professionals such as doctors, lawyers, and accountants can incorporate and benefit from lower tax rates and other advantages like income splitting and deferral.
Retain more income within the corporation for future investments.
Navigating Canada’s complex tax laws can be challenging. Hiring a tax professional ensures you’re taking advantage of all available deductions, credits, and strategies while remaining compliant with CRA regulations.
Schedule an annual tax planning session to review your corporation’s financials and optimize your tax strategy.
By implementing these strategies, Canadian corporations can significantly reduce their tax burdens, leaving more resources to reinvest in growth and innovation.