For business owners, the end of the year is a good time to consider ways to improve your tax position. We’ve put together a list of common year-end tax planning considerations to help you ensure you don’t pay more in taxes than you have to. If you would like help implementing these or other tax-saving measures before the end of the year, please don’t hesitate to contact us.
What’s new this year?
- The small business corporate income tax rate is decreasing from 10.5% to 10% on January 1, 2018, and to 9% on January 1, 2019.
- General and M&P corporate rates in BC are increasing from 11% to 12% on January 1, 2018.
- Small business corporate rates in BC decreased from 2.5% to 2% on April 1, 2017.
- The Finance Minister’s July 18th proposals, if implemented, are anticipated to affect income splitting and taxation of passive income. If you would like to meet with us to review your current strategies and see how best to prepare for any possible changes, please contact us.
Year-end tax planning considerations
Have you planned an effective salary/bonus/dividend mix?
As the owner of an incorporated business, you should carefully consider the best mix of salary, bonus and dividends in your compensation package. What’s best for you will depend on many factors including:
- Your cash flow needs
- Your income level
- The corporation’s income level
- Payroll taxes on salary
You may want to pay yourself enough salary to allow the maximum possible contribution to an RRSP. The maximum contribution is 18% of the previous year’s earned income, up to a limit of $26,230. As such, you will need earned income of $145,722 to make the maximum RRSP contribution in 2018.
Have you considered accruing your salary or bonus?
Once you have decided on the appropriate salary or bonus, consider accruing the salary or bonus before your business year-end but deferring the payment to you until next year (up to 179 days after the company’s year-end). Assuming a December 31 year-end, the company will get a deduction in 2017, source deductions will not have to be remitted until the salary or bonus is paid in 2018, and you won’t have to include the amount in your income until you file your personal tax return for 2018, sometime in 2019.
Have you thought about your family members’ salaries?
If your spouse and/or children work for you, consider paying them a reasonable salary or bonus as well. This will be beneficial where their marginal tax rate is lower than yours. It will also give them earned income for CPP, RRSP and child care expense purposes. You must be able to substantiate that the family member has performed services that are commensurate with his or her compensation.
You may also want to consider paying dividends to adult family members who are shareholders in your company and in a lower tax bracket. Individuals with no other income can receive a certain amount in dividends without triggering any income tax, depending on their province of residence and the ability of the corporation to pay eligible dividends. Be aware that if you earn dividends, your AMT exposure can increase.
In light of the July 18th proposals, you should consider whether dividends, interest, capital gains and other benefits received by an adult family member are reasonable based on the family member’s contribution of labour and financial assets to the business.
Have you considered timing the purchase and sale of depreciable assets?
If you’re considering buying any depreciable assets, try to acquire them before the end of your fiscal year. 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 — you’ll be able to claim capital cost allowance (CCA) on the asset for 2017 at half of the CCA rate otherwise allowable (due to the “half-year” rule). You’ll also be able to claim CCA at the full rate for all of 2018.
If your company has a depreciable asset you’re thinking about selling that will be subject to recaptured depreciation, consider holding off on closing the sale until after your 2017 corporate year-end. That way, you’ll be able to claim CCA on the asset for one more year. You’ll also defer the recapture arising from the sale until 2017.
For tax purposes, you may want to consider making a special election to treat leased fixed assets as assets purchased under a financing arrangement.
Have you also considered other tax planning strategies, such as:
- Taking steps to keep the corporation a small business corporation?
- Repaying funds borrowed from your corporation?
- Applying for apprentice and co-op tax credits?
- Determining whether retaining income in the corporation is right for you?
- Making use of other saving options (such as RRSPs and TFSAs) or setting up an individual pension plan (IPP) to enhance your retirement income?
- Reducing the taxable benefit for your company car?
- Accelerating taxable bonuses and discretionary dividends to 2017 to avoid the higher top tax rate after 2017?
- Deferring to 2019 any discretionary eligible dividends that would otherwise be paid in 2018?
- Using your lifetime capital gains exemption?
- Maximizing capital dividend payments?
- Transferring non-personal assets to the corporation to establish a shareholder loan from which you may be able to later withdraw corporate funds on a tax-free basis?
- Accelerating income to 2017 by minimizing discretionary deductions if your company is subject to British Columbia’s general and/or M&P tax rate?
- Deferring income to after 2017 by maximizing discretionary deductions if your company is subject to small business rates?
- Transferring assets (e.g. real estate, intellectual property and surplus cash) from an operating company to a separate company on a tax-deferred basis?
- Investing the proceeds of the sale of eligible small business corporation shares in other eligible small business corporation shares by April 30, 2018, to be eligible to defer all or part of the capital gain?
- Correcting any non-compliance with your income tax or GST/HST reporting obligations under the Voluntary Disclosures Program?
- Giving employees a non-taxable holiday gift?
- Making charitable donations and provincial political contributions before the end of the year?
Effective tax planning throughout the year can help you and your business save money at tax time. If you’d like to meet with us to review your tax situation and determine what steps you can take in the remaining weeks of 2017 to manage the taxes you pay, please give us a call at 604-534-7701 or email us at email@example.com.