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How Much Income Should Be Put Aside for Taxes in Canada as a Sole Proprietor or Business Owner?

As a sole proprietor or business owner it is essential that you fully understand your tax obligations and plan accordingly throughout the year. This blog will guide you through estimating the amount you should set aside for taxes and contributions, helping you avoid year-end surprises.

Federal and Provincial Tax Rates:

The provincial and federal tax brackets that you fit into determine the rate at which you will be taxed on your income at the end of the year. Estimate the range that you will fit into and use those rates as the general percentage to save:

Federal Income Tax Rates:

  1. 15% on the first $53,359 of taxable income.
  2. 20.5% on the next $53,359 (over $53,359 up to $106,717).
  3. 26% on the next $59,459 (over $106,717 up to $166,176).
  4. 29% on the next $70,958 (over $166,176 up to $237,134).
  5. 33% on income over $237,134.

Provincial Tax Rates:

These rates are applied progressively. This means that each portion of your income is taxed at the corresponding rate for that bracket. It’s important to check the specific rates that are applicable for the province that you pay taxes in as the rates may be different.

Ontario:

  1. 5.05% on the first $49,231 of taxable income.
  2. 9.15% on the next $49,232 (over $49,231 up to $98,463).
  3. 11.16% on the next $12,924 (over $98,463 up to $111,387).
  4. 12.16% on the next $22,243 (over $111,387 up to $133,630).
  5. 13.16% on income over $133,630.

British Columbia :

  1. 5.06% on the first $47,937 of taxable income.
  2. 7.7% on the next $47,938 (over $47,937 up to $95,875).
  3. 10.5% on the next $14,201 (over $95,875 up to $110,076).
  4. 12.29% on the next $23,588 (over $110,076 up to $133,664).
  5. 14.7% on the next $47,568 (over $133,664 up to $181,232).
  6. 16.8% on the next $71,520 (over $181,232 up to $252,752).
  7. 20.5% on income over $252,752

Alberta:

  1. 10% on the first $142,292 of taxable income.
  2. 12% on the next $28,454 (over $142,292 up to $170,746).
  3. 13% on the next $56,908 (over $170,746 up to $227,654).
  4. 14% on the next $113,184 (over $227,654 up to $340,838).
  5. 15% on income over $340,838

Quebec:

  1. 15% on the first $49,275 of taxable income.
  2. 20% on the next $49,275 (over $49,275 up to $98,540).
  3. 24% on the next $20,145 (over $98,540 up to $118,685).
  4. 25.75% on income over $118,685

Canada Pension Plan Contributions:

If you are a sole proprietor, you are also responsible for paying both the employee and employer portions of the CPP contributions. The total rate for 2024 is 11.90% and will apply to the net business income after expenses (up to the year’s maximum pensionable earnings).

How to Properly Plan and Save for Tax Season:

  1. Estimate Your Income and Expenses: The first step to deciding the percentage of your income that you should pay is determining your gross income for the year. Then subtract the allowable expenses to get to your net income.
  2. Apply Federal and Provincial Tax Rates: After you have come to your net income amount, use the applicable federal and provincial tax rate to calculate the tax on this income.
  3. Calculate CPP Contributions: Apply the 11.90% rate to your net income.
  4. Set Aside Funds for Taxes: A good rule of thumb is to set aside 25-30% of your net income for taxes and CPP contributions. Going through the calculation process can help you to properly adjust this percentage based on your specific income level and province.

Tax Savings Example Calculation:

Below you can find a sample calculation to demonstrate the proper way to estimate your tax amount for the year.

Tips to Manage Tax Calculations and Savings

Calculating and managing your business taxes can be an overwhelming task. It is tedious and rules and regulations around it are ever-changing. Unfortunately, it still needs to be done for your business to remain compliant and avoid any penalties. Below are some tips to make the process more efficient and smoother:

  1. Consult a Tax Professional: Tax laws and rates can change, and a tax professional helps you to fully understand your position and provide tailored advice to ensure you utilize all available deductions and credits to reduce your tax owing amount. LedgersOnline provides comprehensive tax services to Canadian businesses. Book a 15-minute consultation and learn more.
  2. Quarterly Tax Payments: Consider making quarterly tax payments to the CRA to avoid a large year-end tax bill and interest payments.
  3. Accurate Record-Keeping: Hire a bookkeeper to help you maintain detailed records of all income and expenses to support your tax filings and avoid issues with the CRA.

By following these guidelines you can stay on top of your business year-end tax filing and better manage your finances throughout the year as a business owner in Canada.

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