Tax planning tips for small business owners

18 November 2025 by National Bank
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Good tax management can help you retain more business income, but making sense of all the rules and regulations can seem overwhelming. Fortunately, you don’t need to be a tax expert to make smart business decisions. Understanding a few key concepts can allow you and your financial advisor to find the best way to optimize your tax plan.

In this article:

How can your business’s income affect its tax rate?

In Canada, small businesses don’t follow the same graduated tax rates as individuals. Instead, they benefit from a reduced rate on a portion of taxable income thanks to the Small Business Deduction (SBD). For most provinces, the SBD applies to the first $500,000 of active business income (in Saskatchewan, the SBD limit is $600,000). This lower rate can significantly affect how much tax your business pays and how much tax you pay personally when you receive either eligible or non-eligible dividends from the company. Understanding how the SBD works will help you plan how to pay yourself and manage your company’s income more efficiently.

How do your corporate investments impact your taxes?

The first $500,000 of active business income taxed at the lower rate is known as the small business limit. This limit can be reduced based on how much adjusted aggregate investment income (AAII) your company earns. AAII is the net sum of income from property, taxable capital gains (passive assets), dividends, interest and foreign investment income. 

For every dollar of AAII over $50,000, your business limit is reduced by $5 – meaning the more successful your investment portfolio, the smaller the amount of active business income that qualifies for the lower tax rate. Some investment structures, such as those held within insurance solutions, may help preserve access to the SBD, so it’s worth asking your advisor about these options. Note that the small business deduction is eliminated at $800,000 of AAII.

What is the tax cost of corporate investments?

Corporate investment income is often taxed at high rates, sometimes even higher than personal income tax rates. For example:

  • Bond interest, GICs, and foreign dividends are taxed at more than 50% in most provinces.
  • Capital gains are more tax-efficient as they’re taxed at the passive income tax rate, and only half of them are taxable. 
  • Dividends from Canadian companies are taxed at roughly 38%.
Picto of a light bulb with a money symbol

Good to know: Much of the tax paid on corporate investment income might be refundable, but only if the income is paid out to shareholders as dividends. If you leave the money in the company, you won’t receive the refund and your investments may grow more slowly due to the tax drag.

What is involved in integration and tax deferral?

The idea behind integration is that the total tax applied to a dollar, by the time it reaches your personal bank account, should be the same regardless of whether it was earned under your personal name or your corporation. In practice, it’s not perfect.

For example, earning investment income in a corporation and paying it out as dividends can result in a higher overall tax burden than earning it personally. Similarly, paying yourself through salary may be more tax-efficient than non-eligible dividends, especially since salary allows for RRSP and CPP contributions.

→ Is it better to pay yourself a salary or dividends? Find out in this article. 

One major advantage of corporations is the tax deferral companies see before taking income out of the company. Active business income is taxed at a lower rate inside the company, allowing for greater capital growth through compounding. A business owner may be better off investing excess profits within the company, even with the heavy tax applied to passive investment income. This deferral can lead to significant long-term gains.

How can record-keeping maximize your tax savings?

Keeping accurate and organized records of your business transactions and expenses is mandated by the federal government, but it’s also a good way to clearly see if there are deductions or credits that you neglected to claim that could help reduce your tax burden.  

What are the tax deductions every small business owner should claim?

There is a multitude of expenses that your business can write off.

The most common include:

  • Staffing: From the cost of hiring independent contractors to the Canadian Pension Plan or Employment Insurance premiums you pay to permanent employees
  • Your physical space, including the rent on a bricks-and-mortar business, utilities, your home office, business supplies, phone and internet
  • Accounting software
  • Travel and entertainment tied to your business
  • Motor-vehicle expenses, such as mileage and gas
  • Marketing and advertising fees: including the cost of promoting your business through branded items and at trade shows, and running ads in broadcast, print and digital media   

The lesser known include:

  • Professional association fees
  • Insurance, such as the premiums on the real estate and equipment tied to your business
  • Private health plans 
  • Property taxes where your business is located
  • Bank charges incurred to operate your business, such as processing fees and the cost of ordering cheques

Which are some common tax mistakes to avoid?

Good tax management means knowing which pitfalls to avoid. Small business owners are required to multitask around the clock. Here are a few common missteps to avoid:

  • Not setting money aside for taxes: To avoid cash flow challenges come tax time, be sure to put aside up to 30% of your income depending on your expected tax rate in a separate account to go towards taxes.
  • Not filing on time: Staying on top of your payments – including quarterly installments – means you shouldn’t have to pay late fees or penalties.
  • Not factoring in sales tax: If you’re not registered for HST, GST or QST (depending on your province) or you forget to claim them, you will likely face back taxes and penalties. 
  • Not leveraging possible deductions: To make sure you’re aware of all the deductions your business can claim to help lower your tax burden, be sure to consult with an expert.
  • Not keeping your business and personal finances separate: It is crucial – for tracking purposes and in the event that you get audited by the Canada Revenue Agency – to have completely independent personal and business accounts and credit cards.

Remember that the best tax strategies depend on your unique business and personal situation. Understanding the basics can help you make more informed decisions and explore tax-efficient strategies that support your business and personal financial goals. Reach out to a financial advisor today.

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