9 Tax Deductions Commonly Missed by Startup Owners

Why startup tax deductions are important

Let’s be honest: Starting a new business can be intimidating. There are are number of business startup expenses that must be covered before you even start generating revenue, and there’s an ever-looming question about whether it will pay off in the end.

That’s why tax breaks for new startups are so important. Without them, the economy would stagnate due to lack of business growth and innovation.

Since the launch phase can be the most expensive part of the process, there are many startup business tax deductions designed to help offset those costs. Yet despite extensive information online about small-business tax deductions, many continue to be overlooked.

What are the most commonly missed tax deductions?

So let’s look at some of the small-business tax deductions you’re less likely to know about:

1. Hiring your spouse or kids

Yes, it’s fairly common knowledge that hiring an employee is deductible on your income tax return. But what you might not know is that there’s an added bonus to hiring your spouse or child as an employee. It’s called income splitting. Since Canadian income taxes are based on tax brackets, employing this strategy can reduce your family’s gross tax level at the expense of some family members paying higher taxes. Since you’re most likely head of the business, you’ll probably have a higher salary. As your income increases, you move through tax-bracket tiers and progressively pay a larger percentage of taxes on your income.

For example, let’s say your business earned taxable income after deductions of $65,000 in 2023. It would be in the 20.5% tax bracket, because it is over $53,359 but under $106,717.

Now let’s assume your business hired your husband as a part-time employee in 2023. Through the year, he earned a total of $20,000. Since his income is less than $53,359, he is in the lowest tax bracket tier and will pay 15%.

But because your business can deduct his payroll, the company’s taxable income is reduced. Using the $20,000 scenario above, the company income tax bracket could fall to the 15% range because the taxable income would be $45,000 ($65,000 – $20,000 = $45,000).

By hiring your spouse or child as an employee of your business, you effectively reduce the taxable income for your business, and potentially keep your business in a lower tax bracket—thus reducing taxes owed.

2. Creating apprentice jobs

Your business can receive up to $2,000 as an investment tax credit, if you hire an apprentice. Whether you run a small lawn-care company with multiple employees or you’re an individual entrepreneur building websites, you can take advantage of this. And while a tax credit is not the same as a deduction, it still works in your favour to potentially lower your tax bill.

3. Business fees and licences

When you pay for specific business licences or annual fees, those expenses are tax deductible. Let’s say you’re a freelance photographer who pays a yearly membership fee to a professional trade organization; that fee is deductible as a business expense.

4. GST/HST payments

Input tax credits (ITCs) allow your business to claim GST or HST payments on goods and services—assuming your company is a GST/HST registrant. This can be significant, because you’re able to claim deductions on taxes paid for parking, ride-share services, and reimbursed expenses, such as an employee paying for a hotel stay.

5. General, everyday expenses

You probably know many of the day-to-day costs that come with running a business may be deductible. But there are also everyday expenses that are missed. These include:

• Insurance fees
• Bank charges, including ATM and credit card fees
• Interest on business loans

6. Advertising and promotion

Whether you use social media, the radio, or place ads with Netflix, these are expenses that can be deducted. Another type of promotion that is often overlooked is providing free samples, free products to reviewers, and donating services to charitable causes.

7. Business use of home

If you have a dedicated space in your home that is used only for conducting business, you may be able to deduct a portion of related home office expenses. Let’s say you have a home office that is a separate room in the house. It’s not a corner of the kitchen or tucked away in the hall; it’s a room unto itself. If that room is your primary place of business, you’re allowed to deduct a percentage of the utility bills, rent or mortgage, as well as similar expenses that qualify.

8. Research and development

Regardless of how big or small your company is, you may be able to qualify for the Scientific Research and Experimental Development (SR&ED) tax credit. This credit is available to individuals, sole proprietors, trusts, and corporations alike, and it can reduce your taxable income or help you get a refund.

9. Provincial tax credits

While some believe that tax deductions are for federal income tax returns only, corporations many also qualify for deductions on a provincial level. One example is the Ontario small business deduction. A company that operates as a Canadian-controlled private corporation (CCPC) through the year may qualify to reduce its tax rate to 3.2% on the provincial level.