Year-End Tax Planning Checklist – Unincorporated Business Owners EditionWill
Most unincorporated business owners / self-employed individuals are aware that they can write-off business expenses against their income to reduce the overall personal tax liability. Unfortunately, other tax saving opportunities are often overlooked and should be considered more carefully prior to year-end. These strategies could potentially defer or reduce your tax bill even further. We will discuss a few of these below.
Salary to Family Members
Do you have a family member who is currently helping you with your business? Consider paying a reasonable salary before year-end to a spouse, common-law partner or child who is in a lower tax bracket and provides services to the business. Any salary paid must be reasonable based on the services performed in order to be deductible to the business. At the minimum, you must keep records of the time spent and services performed in the event of a CRA audit. You should have an employment agreement in place to fully document the job description of each family member in order to past the Canada Revenue Agency’s (CRA) reasonability test.
Purchase Capital Assets
Does your business require any machinery or equipment in the short run? Consider accelerating the purchase of depreciable assets (e.g., new business equipment, office furniture, etc.) before year-end. One-half of a full year’s tax depreciation can be deducted in the current year, as long as the asset is available for use at year-end. For example, a $1,000 purchase of a laptop on December 30 is eligible for full year’s tax depreciable using $500 as cost base.
If you are required to pay tax by instalments, the final quarterly instalment of tax is due on December 15. Make a payment at least 5 business days in advance to ensure that the CRA receive your tax instalment by the due date to avoid the 5% interest charges compounded daily.
Motor Vehicle Usage
If you use your motor vehicle for business purposes, ensure you maintain an automobile logbook to support motor vehicle expense and taxable benefit calculations. In certain circumstances, a logbook maintained for a sample period will be sufficient for CRA purposes.
This is a good time to update your logbook, as you will need this information in order to file your self-employment tax return. You need to ensure that you have proper documentation of the business mileage to maximize vehicle expense deduction.
Some entrepreneurs may find it tedious and inefficient to use a logbook to document the car mileage. There are many cloud accounting solutions that will help track the business mileage automatically.
Self-employed individuals do not get to enjoy the same health benefits that employees do. If you have a private health service plan (PHSP), talk to your accountant to determine whether PHSP premiums paid can be deducted from self- employment income. Premiums that are not deductible may be claimed as a medical expense.
Employment Insurance (EI)
Unlike employees, it is not mandatory for you to have employment insurance. However, you should consider opting in to the EI program to be eligible for maternity, parental, sickness or compassionate care benefits.
Consider joining a pooled registered pension plan (PRPP), which is a voluntary saving plan similar to a defined-contribution RPP or group RRSP.
Has your business grown since you first started your business? Perhaps it is time for you to consider incorporating before year-end to avoid reporting as a self-employed individual in the following year. There are plenty of tax benefits associated with incorporating your business. The most commonly known advantage is the tax deferral opportunity on low corporate tax rate. For example, Ontario levies a 15% corporate tax up to the first $500,000 of profit for most small businesses. Conversely, a self-employed individual would pay 53.53% marginal tax on the same income. That is a whopping 38.53% difference in tax rates simply by incorporating. Having said that, the decision to incorporate should not solely be based on tax, as there are a wide range of pros and cons to consider. You should talk to your accountant to assess both tax and operation factors to determine if incorporation is the right choice for you.