Year-end is just around the corner. If you haven’t already, now is the best time to have a chat with your accountant to see what you can do to optimize your taxes as a corporate business owner. There are many tax planning opportunities available when running a business. Here is a list of some steps that you can apply before year-end.
Determine the optimal mix of salary and dividends for you and other family members. Consider factors such as your marginal tax rate, the corporation’s tax rate, payroll taxes, RRSP contribution room, CPP contributions and other deductions and credits (e.g., child care expenses, donations, etc.). If the cash is not needed, consider retaining the funds in the corporation to maximize tax deferral.
Dividends to Family Members
Consider paying dividends to adult family members who are shareholders in the company and in a lower tax bracket. Individuals with no other sources of income can receive up to approximately $35,000 in dividends before any federal tax is payable.
Salary to Family Members
Pay a reasonable salary before year-end to a spouse, common-law partner or child who is in a lower tax bracket, and also provides services to the business. Any salary that is paid must be reasonable based on the services performed by the employee in order to be deductible to the business. Keep records of the time spent and services performed as well. A legitimate employment contract would be a great supporting document in the event of a CRA audit.
If possible, delay selling investments with capital gains until the following year. The business is not required to pay tax on accrued gain until the assets are ultimately sold.
Accrue reasonable bonuses before the company’s year-end. Any bonus accrued (and not paid) at year-end can be claimed as a business expense. Ensure accrued amounts are properly documented as being legally payable at the company’s year-end and are actually paid within 179 days after the company’s year-end. This allows deferral of tax on bonus as employees do not pay tax until it is paid.
Make tax-effective corporate withdrawals of cash from the corporation before year-end by paying tax-effective dividends or non-taxable capital dividends, returning capital or repaying shareholder loans.
Consider accelerating the purchase of depreciable assets (e.g., new business equipment, office furniture, etc.) before the end of the year. The half-year rule allows the deduction of one-half of a full year’s depreciation, as long as the asset is available for use before year-end.
Monitor the corporation’s taxable capital and consider planning to reduce taxable capital before year- end, if needed. Canadian Controlled Private Corporation (CCPC) with taxable capital above certain limits will begin to lose access to the small business deduction and enhanced investment tax credit (ITC) for SR&ED.
Review inter-company charges to ensure charges are reasonable and consider any adjustments to reduce the overall taxes of a related group
Make charitable donations and political contributions before year-end.
Ensure that shareholder loans are repaid by the end of the corporation’s taxation year following the taxation year in which the loan was received. There could be adverse tax consequences if the shareholder loan is not repaid within one year.
Corporate Tax Balances
Pay final corporate income tax balances within two months (three months for certain CCPCs) after year-end to avoid interest charges.
If your business is eligible for Scientific Research and Experimental Development (SR&ED) tax incentives, ensure that claims for SR&ED expenditures or ITCs are filed by 18 months after the corporation’s year-end.
Lifetime Capital Gains Exemption
Ensure that the business continues to qualify as a small business corporation, shares of which are eligible for the lifetime capital gains exemption. Consider crystallizing the lifetime capital gains exemption and/or restructuring to multiply access to the exemption with other family members.
Business owners also may want to consider succession planning techniques, such as an estate freeze to minimize tax on death and/or probate fees. An estate freeze is used to reduce taxes on death and involves the transfer of the future growth of a business to family members.