Business Owners: Tips for Year End Tax-Planning

Is it too early to think about year end? As a business owner, if you are thinking about tax-planning strategies, not at all. Now is the time to take steps in order to help minimize 2018 corporate taxes and plan ahead for 2019. Here are some helpful tips to review with your professional advisor: 

1. Consider the New Passive Income and Refundable Dividend Rules

  • For taxation years starting after 2018, certain passive income earned in the company, and associated companies, in excess of $50,000 will reduce the small business deduction (SBD). If you are at risk of exceeding the threshold in future years, there may be options: defer passive income (i.e., wait to trigger capital gains, etc.), realize capital losses, or review options to reduce active business income.
  • With the new income sprinkling rules in place restricting the payment of dividends, consider whether family members can be paid a reasonable salary.
  • Changes to the company’s refundable dividend tax on hand (“RDTOH”) account will be effective for taxation years after 2018, so consider whether RDTOH should be refunded in the current year.

2. Minimize the Impact of Taxes on Bonuses

  • Bonus payments can be deferred up to 179 days after a corporation’s year end and the company can still claim the amount as a deduction for tax purposes in the current year. With federal corporate tax rates decreasing in 2019, it may be beneficial to get the deduction at a higher rate. However, consider whether you believe personal tax rates will change in 2019, potentially offsetting the benefit.
  • For year-end bonuses, consider having the company contribute directly to the employee’s Registered Retirement Savings Plan (RRSP). While this is considered employment income, there are no income tax withholdings required (CPP and EI withholdings will apply if maximums have not been reached in the calendar year).

3. Evaluate how Funds are Extracted from the Corporation

  • Review your remuneration strategy to determine if it is more tax effective to receive salary or dividends, especially if the company’s SBD will be reduced by the amount of passive income earned in the company. Changes to provincial and/or federal tax rates may change “integration”, so there may be advantages to paying one over the other.
  • Since other-than-eligible dividend tax rates will be increasing in 2019, determine whether it is more advantageous to declare dividends in 2018.
  • If you require funds before year end, consider repaying shareholder loans, declaring capital dividends or reducing the paid-up capital of your shares in order to extract funds on a tax-free basis.

4. Be Timely with Purchase of Capital Assets

  • Consider purchasing fixed assets before the end of the company’s tax year. Currently, you can claim one-half the amount of tax depreciation, or capital cost allowance (CCA), to reduce business income in this fiscal year and claim the full amount next year.

As always, please seek professional advise for your unique situation, and get help to minimize 2018 corporate taxes.