How to reduce taxes for your franchise
Buying into a well-established franchise can be personally and financially rewarding, with less risk involved than launching an untested venture.
Buying into a well-established franchise can be personally and financially rewarding, with less risk involved than launching an untested venture. An estimated 78,000 franchises currently operate in Canada under 1,300 familiar and trusted brand names, from Tim Hortons to Mr. Sub.
As with any business, you’ll want to cut costs where you can in order to increase profits. These tips can help franchisees save money on taxes by avoiding common mistakes and making the most of eligible deductions.
As a franchisee, you can claim a number of eligible expenses to reduce your taxable income, including royalty fees, rent, management fees, the purchase of goods, advertising and other promotional costs.
You can also claim the Capital Cost Allowance for a franchise agreement that has a limited and ascertainable life – a depreciable property under Canada Revenue Agency (CRA) guidelines. An accountant can help you determine the claimable amount, based on your franchise term agreement in the relevant tax year.
A business loss can also be claimed as a tax deduction (such as an unpaid invoice). Your accountant can help you decide on the most advantageous tax strategy concerning losses.
Structuring your franchise as a corporation can be a smart financial move for your business, especially if you’re earning consistently high profits.
Incorporation makes your business a separate entity, protecting you from personal liability. You’ll also be able to take advantage of income splitting – a tax-saving strategy that allows you to distribute your income among lower-earning family members. By paying your spouse and children a reasonable salary, you can reduce your family’s overall taxes.
If you can’t hire family members to work for your franchise corporation, you can make them shareholders and pay them dividends, which are typically taxed at a low rate. The corporation will pay taxes on this money but, depending on the personal incomes of your family members (and the province or territory where you live) there may be an overall tax savings.
If you’ve signed an international franchise agreement, you may not realize the Canadian Income Tax Act stipulates a 25% withholding tax on payments to non-residents – with responsibility for payment resting with the franchisee.
Although the Canada-U.S. tax treaty requires a reduced rate of 10% to 15%, this withholding tax can quickly add up for ongoing management fees, rents, royalties and other franchise-related payments.
Withholding taxes are due the month following payment to a non-resident, and late or non-payment can result in interest and penalties. You can avoid trouble with the CRA by authorizing automatic deduction of a pre-set amount each month to cover your anticipated withholding taxes.
Of course, there are plenty of regular business expenses that are tax deductible. Be sure to check the Canada Revenue Agency website for a complete list of eligible expenses available to all businesses.
(This information is presented for educational purposes only and should not be considered as tax advice. Be sure to consult with a qualified tax specialist to obtain tax advice specific to your business or personal situation.)