*While this post is written under the assumption that your fiscal year end is December 31st, these concepts can be applied based on any fiscal year end date.
If you own a small business, it is very important to plan how you can set yourself up for success for the year ahead. Most businesses know to dedicate time to their operational plan, but it is equally important to dedicate time to how you can set yourself up now to maximize your benefits and minimize your tax obligations. Proper planning now means more cash left in your pocket to focus on what is important – your business!
The following are examples of tax issues you should consider before 2022:
- Compensation
It’s time to consider whether you should change your structure and pay yourself through a salary or dividends. The answer to this is dependent on your personal situation, including cash flow needs, desired income level, RRSP plans and more.
To learn more about what the right structure is for you, please click here.
If you decide upon paying yourself a salary or bonus, consider accruing the amount in the business at year-end but defer the receipt of it until next year ( you have up to 179 days to do so). This would mean that you can get a business reduction in 2021 but not need to remit the source deductions to the CRA until it is actually paid out in 2022.
- Family Tax
If you have family members who provide services to your incorporated business, you may want to consider employing them and paying them an appropriate salary. Your company will get a tax deduction for the salary paid, as long as the amounts are “reasonable”. A salary is usually considered reasonable if the services are genuinely being provided, and the salary is similar to a comparable market rate.
This formal structure will cost the business regular employer-type taxes like CPP or EI, but tax on split income (TOSI) rules would likely not apply. TOSI amounts means that the person would be taxed at the highest marginal tax rate, so it can be quite beneficial to consider this set-up.
If your succession plan includes passing on your business to your children or grandchildren, you also need to consider the rules on intergenerational transfers, such as the transfer of shares to corporations controlled by family members.
- Business Tax
Tax Deductions
Consider if you are eligible to claim small business tax deductions on your 2021 tax return. To maximize your benefits, if you pay inter-corporate dividends you should calculate “safe income” before paying such an inter-corporate dividend or redeeming shares.
This is because certain tax-free inter-corporate dividends could be recharacterized as taxable capital gains under specific anti-avoidance tax rules. By calculating “safe income” you can determine if that dividend qualifies for the exception to the anti-avoidance rules for dividends paid out of a corporation’s safe income.
Fixed Assets
If you are thinking about selling a depreciable asset owned by your company, you may want to defer the sale until after your 2021 corporate year-end, as long as it makes sense for your business. That way, you’ll be able to claim capital cost allowance on the asset for one more year. You’ll also defer any recapture arising from the sale until 2022.
On the other hand, if you’re considering buying any depreciable assets, try to acquire them before your year-end. As long as you can actually put the asset to use in your business this year, acquiring the asset just before the company’s year-end will accelerate the timing of your tax deduction.
Shareholder Loans
If you borrow money from your corporation at low or no interest, you are generally considered to have received a taxable benefit from the corporation. Unless the loan is for a limited number of qualified purposes, it will be included in your income for tax purposes in the year it was advanced, unless you repay it within one year after the end of the company’s taxation year in which the loan was made.
Double Check your CPP and EI Payments
As an employer, your company has until December 31, 2021 to file a refund application for CPP contributions overpaid in 2017, or for EI premiums overpaid in 2018 (i.e., no later than four years from the end of the year in which the CPP overpayment was made, and no later than three years from the end of the year in which the EI overpayment was made).
Sell Investments with Capital Losses/Gains
If your company owns investments with unrealized capital losses, consider selling them before your company’s year-end (but only after your company’s capital dividend account has been paid out). This way, your company can realize the loss and apply it against any net capital gains your company realized during the taxation year, or in the past three taxation years. There are some complex rules regarding the timing of these sales, so be careful to ensure eligibility before doing so.
This is just an example of common items to consider before your corporate year-end. Other items such as the impacts of COVID-19 benefits, estate planning and others are also key items that may be applicable to your situation.
Year-end tax planning is just one of the many services that Stonehenge Accounting can do to help your business succeed. Please contact us if you have any questions.