Corporate tax planning is not just a tax season chore; for Canadian businesses, it can shape cash flow, growth plans, and even retirement plans. With the right legal advice, tax planning strategies can help keep more income in the company instead of using it to pay an outstanding tax bill.
In this article, we will discuss these strategies with the help of a lawyer and expert in the field of tax planning. If you want to learn more, you can consult a Lexpert-ranked corporate tax lawyer in your jurisdiction.
What is corporate tax planning?
Aron Grusko, a tax partner at Fillmore Riley LLP, provides some insights on corporate tax planning and how it works. "Corporate tax planning is the area of law that focuses on achieving a client's business objectives in the most tax-efficient manner," he says.
Some examples of corporate tax planning strategies Grusko cited include:
- business formation and structuring
- entering new markets or business lines
- buying or selling assets or other businesses
- succession planning for the next generation
- owners exiting their own businesses
In other words, corporate tax planning is a year‑round way of managing how a business is taxed, which also starts from start‑up through to closure. It means looking at income, expenses, investments, and structure, then arranging them, so the business pays only the tax it legally owes, and nothing more.
Watch this video to learn more about tax planning, in the context of small businesses in Canada:
We'll discuss more corporate tax planning strategies below. To get tailored legal advice, you can reach out to the best corporate tax lawyers in Canada as ranked by Lexpert.
Corporate and tax lawyer are the main types of lawyers in Canada. Explore the list, what they do, and find out which path matches your skills and goals.
Why corporate tax planning matters
The goal of corporate tax planning is to use the rules under corporate tax laws in a smart way, so that more money stays inside the business instead of being used to pay taxes. These laws include federal statutes, such as the Income Tax Act (ITA), and other regulations from the Canada Revenue Agency (CRA).
Here are some other advantages of effective corporate tax planning for your business:
- supports long‑term goals: it connects everyday choices, such as how to pay owners or when to buy assets, with major moves like expansion, sale, or succession planning
- makes legal and accounting advice more effective: if the company works with a tax lawyer or accountant on a plan, they can match the structure, credits, and timing strategies to the company's real plans
- businesses can avoid stress and extra costs: late filings, underpaid instalments, or incorrect tax returns can lead to penalties and interest, while a tax plan helps track deadlines for corporate taxes, GST/HST, and payrolls
Corporate tax planning strategies for Canadian businesses
Below are some examples of corporate tax planning strategies you may want to consider for your business.
Choosing the right business structure
Having the right business structure is often a good starting point.
For instance, many Canadian business owners move from a sole proprietorship to a corporation, so they can access lower corporate tax rates on active business income through:
- Small Business Deduction (SBD) on a set amount of active business income
- income splitting opportunities, but only where tax rules allow
Rules on Small Business Deduction
The SBD is a reduction on corporate income tax (CIT) for eligible corporations or businesses. To qualify, they must be:
- considered a Canadian-controlled private corporation (CCPC)
- earn income from an active business
These terms are defined in the ITA. Its application to your business and how the SBD is calculated should be reviewed with your corporate tax lawyer.
Income splitting opportunities
This involves the shifting of income from a high-earning spouse to a spouse or family member in a lower income tax bracket. While there are several income splitting opportunities, here are examples that can help business owners reduce their taxes:
- interest-free loan: one spouse provides an interest‑free loan to the other spouse's business, which increases the business owner's capital without being taxed as business income; the loan needs to be at a CRA prescribed rate, Grusko says
- spouse as a partner: a business where both spouses are partners, so both are legally entitled to share in the profits (and losses) of the business; if used colloquially, it may be subject to the Tax on Split Income Rules, Grusko adds
Family trust owning company shares
Holding companies and trusts can be added to protect assets, separate operating risk from investments, and prepare for succession or sale.
"Many business owners are considering their next steps – whether succession to the next generation, an exit and sale to a third party, a transition to employees, or something else," Grusko says.
He adds that "[w]hile tax planning is a fact-specific endeavour and professional advice should always be sought, a common strategy for family businesses is to have a family trust own the shares of an operating company."
The advantage of family trusts, according to Grusko, is that "[t]his often enables flexibility to achieve one's business goals – whatever they may be – in a tax-efficient manner."
Learn more about family trusts in this video:
Consult these Lexpert-ranked best corporate tax law firms in Canada to find tax planning strategies that fit your business.
Combining dividends and salaries
Another tax planning strategy related to family members in the business is to mix salary and dividends, which can balance corporate and personal taxes:
- salary is deductible for the corporation, and can be used to create contribution room for:
- Registered Retirement Savings Plan (RRSP), which is tax-deferred
- Canada Pension Plan (CPP), which is funded by tax‑deductible contributions
- dividends are generally taxed at the personal level, but a tax credit may be claimed for taxes already paid at the corporate level, Grusko notes
In addition, paying family members a reasonable salary for actual work done can shift their income into lower tax brackets. However, this should still comply with CRA rules on reasonableness and tax on split income.
Using deductions, CCA, and credits
With the help of a tax lawyer, businesses can also take advantage of several tax deductions, including the Capital Cost Allowance (CCA) and other applicable tax credits. It also involves timing how income and expenses are recorded in the business' books. To sum things up, there are a lot of deductions in a corporate income tax return that businesses can explore to reduce their tax liability.
Timing income and expenses
Corporate tax planning often involves deferring some income to next year, while bringing forward some expenses into the current year. Here are some examples of how to do this:
- invoicing later when next year's income will be lower, and pre-paying certain expenses before year‑end, so the deduction potentially lands in a higher‑income year
- for larger items, businesses can time asset purchases, so that they are used before the end of the year and qualify for CCA deduction in that year
For more tips on timing income and expenses, you can talk to a corporate tax lawyer in your province or territory. This helps keep your corporate tax planning compliant with Canada's tax laws and regulations.
How can lawyers help clients with corporate tax planning strategies?
"Tax law is complicated," Grusko points out. "Tax lawyers specialize in working with their clients and their clients' professional advisors to achieve clients' business objectives in a tax-efficient manner.
"It would be safe to say that corporate tax-planning strategies cannot – or should not – be implemented without the assistance of a corporate tax lawyer."
Grusko adds that "[i]t is important that clients involve their tax professionals early and often to ensure their goals are met in a tax-efficient manner. It is always best to plan ahead, which is perhaps the 'golden rule' of tax planning."
As such, lawyers and accountants must be engaged not only when things go wrong but also early in the business formation process. This way, corporate tax planning is built into the business from the start.
Corporate tax planning: Using tax rules for business growth
While it is not a quick fix that suits every business, corporate tax planning can support businesses at every stage. When strategies are set early, business owners can manage cash flow, plan major purchases, and prepare for retirement with fewer surprises.
As always, legal advice helps align these moves with Canada's current tax laws and the business' long‑term goals. For this, a Lexpert-ranked corporate tax lawyer can help map out these decisions, so the strategy makes sense for both the business and the legal side.
Subscribe to the free Lexpert newsletter for updates on Canadian tax law, including the different strategies and legal implications of corporate tax planning.