Managing business profits for tax advantages

Using tax savings to grow your business

Tax assessments on businesses differ significantly from those individuals face. With one year closing and a new one on the way, small business owners in British Columbia have both opportunities and challenges: evolving tax rules, tariff volatility, and shifting economic trends to name a few. Knowing how to use tax strategies effectively can unlock savings that fuel growth and investment. 

An incorporated small business pays far less tax on its profits than its owner does when those profits are taken out as income. The difference between personal and corporate tax rates can create a wealth-building opportunity if the company makes more money than it, and the owner, need to meet expenses.

To fully benefit, you'll want to understand how to capitalize on this opportunity, but also be aware of any drawbacks. 

Make use of the small-business tax rate

In British Columbia, there are two rates for corporate income tax: 

• Small business rate: 2% provincial + 9% federal = 11% combined on the first $500,000 of active business income.
• General corporate rate: 12% provincial + 15% federal = 27% combined on income above $500,000. 

This creates a tax-savings and investment opportunity for small business owners. For example, if your company earns $1,000 under the small business rate, you retain $890 after tax. Paying that out as a dividend could trigger personal tax of about $250, leaving $640 for personal reinvestment. But if the company invests directly, you keep the full $890 working inside the business until withdrawal.

The strategic advantage? You control the timing of payouts – salary vs. dividends – and can defer personal tax while compounding corporate investments. 

Investing tax savings

What if, instead of paying the net earnings out as a dividend, your company invested them? From that $1,000 profit, you'd be able to put $890 to work inside the company, compared to only $640 if paid out as a dividend. The $250 difference remains taxable, but only when withdrawn, allowing it to grow in the meantime.

Remember, you'll be taxed personally only when the money is taken out of the company, providing another potential advantage. You get to control the timing of the payout and also whether it's taken as salary or as a tax-advantaged dividend.

Think of corporate reinvestment, where retained earnings can be deployed into growth initiatives –equipment, staff, marketing, or expansion – without immediate personal tax drag. And when it comes to your business investment choices: 

• Favor assets that appreciate (equities, corporate-class mutual funds) over interest-bearing instruments, which face higher corporate tax rates.
• Consider tax-efficient structures like holding companies to protect retained earnings from creditors and preserve eligibility for the Lifetime Capital Gains Exemption (LCGE) when selling shares of a Qualified Small Business Corporation. 

Proceed with caution 

Of course, nothing to do with taxes is ever free from complications, and there are always changes and potential pitfalls to be aware of. Here are a few to be aware of:

• LCGE risk: Excessive passive investments inside the corporation may disqualify you from the LCGE, which shields up to $1.25M of capital gains on qualifying shares (indexed for 2026).
• Creditor exposure: Retained earnings are vulnerable unless protected through structures like holding companies or trusts.
• Passive income tax: Corporations face punitive rates on investment income, reducing the benefit of holding certain assets inside the business.

And finally, because we are in an era of back-and-forth tariff and trade wars, both exporters and importers in BC will continue to face taxing uncertainties in the months ahead. U.S. trade policies, especially in forestry and agriculture, will be particularly challenging, and reciprocal measures will also muddy the waters. If you need further help, programs like PacifiCan’s Regional Tariff Response Initiative can provide funding and guidance for diversification or speak with a BlueShore Business Advisor. 

Seek advice before investing

For incorporated small business owners in BC, 2026 will be about balancing tax efficiency with resilience. Retain earnings strategically, invest in growth, and stay alert to tariff and economic shifts. Above all, seek professional tax and financial advice tailored to your circumstances – because the right structure today can unlock wealth-building opportunities tomorrow. 

BlueShore Financial, GFCU Savings, Gulf & Fraser, Interior Savings and North Peace Savings are trade names of Beem Credit Union.