Year-end tax-saving ideas for Canadian business owners, Digi Mart USA News: Business owner Danny built a thriving clowning agency from a part-time idea, and his son now wants to take it over. Danny asked for ways to pay less tax, and Tim Cestnick, an author and co-founder and CEO of Our Family Office Inc., shared a list of year-end tips with him.
The first tip is to buy and use equipment before December 31. The proposed Productivity Mega Deduction allows a 100-per-cent first-year write-off for most equipment, computers and software purchased and available for use after September 14.
Equipment must be available for use by year-end to count this year, so a laptop still in its box will not qualify. Buildings, goodwill and certain vehicles are generally excluded, and unincorporated owners cannot use the deduction to create or increase a business loss.
Second, owners can hire family members. A reasonable salary paid to a lower-income spouse or children for work in the business is deductible to the business, and the recipients may pay less tax.
The wages must be reasonable for the work performed, so paying a 10-year-old $60,000 to stuff envelopes would not be acceptable.
Third, premiums paid to a private health services plan may be deductible against business income, within limits. There is no such deduction for proprietorships in Quebec.
The deduction could provide more tax relief than claiming the medical expense tax credit for the same costs paid personally.
Fourth, owners without a workplace pension should consider contributing to an RRSP for themselves or a spousal RRSP, or joining the Saskatchewan Pension Plan, which any Canadian resident can join. The article notes that contributions of up to $33,810 are possible for 2026, subject to RRSP room.
Dividends do not create RRSP room, and earned income of $196,611 in 2026 is needed to make the maximum $35,390 contribution in 2027, so additional salary or bonus paid by year-end could help. Salary also builds CPP pension.
Fifth, an individual pension plan may boost retirement savings beyond what an RRSP allows. Contributions are deductible to the company, and income earned in the plan is not subject to the passive investment income rules that can erode the small business deduction.
The author recommends consulting an adviser or actuary familiar with these plans.
Sixth, owners who own more than 40 per cent of their business are generally excluded from paying employment insurance premiums or claiming benefits, but they can opt in to qualify for maternity, parental, sickness or compassionate care benefits. Claims carry a 12-month waiting period, so the article advises acting early.
Premiums are payable for as long as the owner remains self-employed after opting in.
Seventh, if earnings exceed spending, incorporating may allow tax to be deferred on earnings left in the company. The article states that the small business deduction gives an average tax rate of 10.8 per cent on active business income across Canada in 2026 and 10.6 per cent in 2027, which is much lower than personal rates anywhere in the country.
Eighth, leaving unneeded cash in the corporation leaves more after-tax dollars to reinvest. However, once passive investment income in the company exceeds $50,000, the small business deduction shrinks by $5 for every $1 over that threshold and disappears at $150,000.
An individual pension plan or a permanent life insurance policy can shelter investment income from these rules.
Ninth, dividends can be shared with family members, but carefully. An adult family shareholder with no other income can receive about $80,700 in dividends tax-free, depending on the province and the company’s ability to pay eligible dividends.
Tax on split income rules can tax those dividends at the top rate unless an exception applies, such as dividends to a spouse aged 65 or older. The article notes that tax rates on non-eligible dividends rise in Ontario in 2027 and are proposed to rise in Quebec, so paying planned dividends before December 31 may be worth considering.
Owners should also watch for alternative minimum tax.
Tenth, owners can withdraw money tax-free. Drawing down a shareholder loan balance is a tax-free repayment when funds are needed.
If the company has a capital dividend account balance, paying out tax-free capital dividends as soon as possible is suggested, since rule changes or capital losses could erode that balance.
