Corporate Income Tax, Small Business

Year-End Tax Strategies

It’s never too early to start planning your year-end tax strategies.

For many businesses, the month of October signals that the end of the fiscal year is not far away. Realizing that December 31 is fast approaching should prompt you, as an owner-manager, to review your year-to-date corporate and personal data and start putting your tax strategies into place. At the same time, remember to set up a meeting with your CPA. (Corporations can have a fiscal year end other than Dec. 31; this would, of course, affect the timing of the year-end meeting.)

Remuneration

Five main issues affect remuneration and taxation:

  1. Was a bonus or dividend declared during the fiscal year but not paid until the following calendar year?
  2. How much remuneration did you receive through normal salary or wages in the calendar year?
  3. Were the draws or loans taken by a shareholder or related party during the company’s fiscal year fully repaid to the company in accordance with the requirements of the Canada Revenue Agency (CRA)?
  4. Are any draws or loans taken between the corporate fiscal year end and the end of the calendar year to be included in your taxation year?
  5. Will any discrepancies between the corporate fiscal year-end date and the timing of payments and repayments of draws or loans impact your taxable income?

Have your CPA tax advisor review both your corporate and personal records to bring you up to date on the tax rules and their potential impact on taxable income.

Corporate Income

Now is the time to carry out a cursory review of the corporate profit or loss to determine whether the level of corporate taxable income suggests paying you a bonus. Should profits be paid to you and your employees to reduce or eliminate corporate taxes? Depending upon the individual’s marginal tax bracket, reducing corporate tax by means of bonus payments is a great tax strategy; however, where corporate or personal cash flow is problematic, it may be more astute to pay the corporate taxes rather than pay or defer the additional remuneration required to reduce the corporate tax to zero. It is certainly feasible to pay the owner-manager, withhold the appropriate deductions, and then have the owner-manager lend the balance to the company. However, consideration should also be given to the “Due to Shareholder” account. If it becomes too large, the company may have difficulty repaying this “tax-paid loan” to the shareholder(s).

Family members’ remuneration is often overlooked as a means of reducing corporate profit.

A CPA may also provide guidance regarding payment to the owner-manager’s family members who supply services to the company. Often family members’ remuneration is overlooked as a means of reducing corporate profit without the need to accrue corporate profits to the owner-manager(s). The appropriate allocation of remuneration among family members may assist in maintaining a lower tax rate for all family members and thereby collectively leave more take home pay. Where there is more than one owner-manager, there may be a need to review the structure of owner-manager payout packages to maintain a harmonious relationship among all concerned.

In addition to the normal streams of income for the company, your CPA will be able to help determine whether regular dividends or capital dividends (if available) should or could be declared and paid.

Deductions from Personal Income

This time of year is also a great time for your CPA to combine a review of corporate profits and potential personal income with a review of potential deductions. Your CPA will review “employment” income and determine whether there are major deductions that should be taken advantage of to reduce personal taxable income. Major deductions that may be reviewed include:

  • Registered Retirement Savings Plan (RRSP) contribution room (considering any Pooled Registered Pension Plan (PRPP))
  • capital losses from prior years if any capital gains have been earned
  • investment portfolios (considering gains or losses from current or prior years)
  • profits or losses from other business ventures such as personally held rental property or partnership ventures
  • non-capital losses from previous years that may be applied against current-year income
  • potential for income splitting should you or your spouse receive a pension from previous employment plans
  • portfolio management costs incurred for your personal investments.

The Right Thing to Do

Tax planning for owner-managers involves more than just determining taxes payable. When reviewing and discussing your business and personal income issues with your CPA, you should be able to determine the:

  • impact of various income scenarios on current personal taxable income
  • impact of various corporate payout scenarios on current corporate income tax
  • cash flow requirements for both the owner-manager and the company when various hypothetical amounts and types of remuneration are calculated
  • cash flow requirements for the corporate entity to pay out deferred bonuses, any resulting withholding taxes, or corporate taxes
  • taxable income issues that may arise for owner-managers for the next calendar year, such as:
  • additional income as a result of investment portfolio changes
  • balances in RRSPs or TFSAs that could determine investment strategies
  • age change (e.g., turning age 65) that could create income from Old Age Security, CPP or other pension plans
  • number of years remaining before you need to roll your RRSP into a RRIF or an annuity
  • changes in the company’s shareholder list
  • changes in family member status as a result of divorce, death, retirement, resignation or new family members joining the company in some capacity (e.g., as employees or shareholders)
  • anticipated sale of assets or investments.

Productive Talk

The long-term relationship of your CPA with the company, the owner-managers and family members allows meaningful discussions that will provide a level of satisfaction not only for the company and the owner-managers but also for your CPA, who takes pride in seeing you and your business succeed.


 

The preceding article is reprinted from the October 2014 newsletter Business Matters with the permission of the Canadian Institute of Chartered Accountants.  Business Matters is a bi-monthly newsletter, the full version of which can be obtained on request. 

This post deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

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