Business Year-End Tax Tips
 

One of the biggest challenges in building your own business is generating enough revenue in the early years. By taking advantage of tax benefits, small business owners can save money on both the corporate and personal side.

"Various tax scenarios involving the corporate owner/manager must be looked at depending on the size of your company," explains Chartered Accountant Eric M. Moles, Proprietor, Eric M. Moles, CA in Sudbury.

"By planning ahead and reviewing your company's financial position, you can maximize these tax benefits and save money – if you act or at least plan, before year end."

Here are his top 10 tips for owner managers to gain corporate tax savings.

1) Report sufficient salary to ensure that you can benefit from all the tax deductions that are available to you and your spouse personally. The salary is always a tax deduction to the company. Even if there isn't sufficient corporate profit or cash flow to cover the salary, you as the owner can loan back the salary proceeds to the company. If a corporate loss is created, the loss can be carried back to offset any profits of the previous three years and carried forward to offset future years' profits. This scenario usually applies to fairly new companies where the owner is building the business, reinvesting any available profits, and possibly relying on savings or other sources.

2) Ensure that you are reporting enough income personally – at least $36,000 – to utilize the low taxes of the first tax bracket if there is sufficient corporate profit. The corporate rate for small business in Ontario is 18.62 per cent. The personal rate for the lowest bracket up to $36,378 of income is about 22 per cent before personal credits. It is likely as the corporation prospers and profits increase you will be withdrawing substantial amounts to enjoy the benefits personally and therefore reporting personal income in higher tax brackets. In the early years, you should not waste utilizing the reporting of personal income in the low tax brackets even if you do not wish to draw all the income. You can loan it back to the company and create tax-paid capital in the company, which you can draw later when the company has built up cash resources.

3) If your company has sufficient cash and profits, you may want to ensure that you report a salary up to the maximum CPP pensionable earnings of $42,100 to ensure you are paying the maximum amount into the Canada Pension Plan (CPP). It is desirable for an individual if he/she has the income to pay in the maximum CPP premiums to generate if possible the maximum CPP benefit when they turn at least 60 or later. The company portion of the CPP premium is deductible to the company, and the employee portion is deductible by the employee.

4) Pay bonuses to shareholders to utilize any Registered Retirement Savings Plan (RRSP) contribution room you as the owner/manager may have. These bonuses are deductible by the company, while the additional income to the owner/manager is offset by the related RRSP premiums to his/her RRSP.

5) Review your company's financial records for any indebtedness you as the owner owe to the company. Often owner-managers will draw cash from the company over and above any salary they are reporting, creating indebtedness by the shareholder to the company. If shareholder indebtedness is not paid back within a year or converted to salary or dividends, the owner/shareholder may be assessed a non-deductible tax benefit and owe more taxes.
The planning for any salary dividend mix should take into consideration any such indebtedness on the books of the company.

6) Hire family members where reasonable and allocate reasonable salaries to your spouse or children for services performed. This income-splitting strategy allows you to better equalize income between you and your spouse or child, who may be at a lower income level, and reduce taxes on overall family income. You will pay tax on less income, while your spouse or child will pay tax at a lower tax rate than you would if all the income was reported by one person. Salaries and wages paid to family members must be reasonable in relation to the services performed (what such services would command in the marketplace).

7) Depending on corporate profitability and personal cash flow needs, you may want to ensure you are reporting at least $105,556, in salary (and your spouse if reasonable), to generate the maximum annual RRSP contribution limit of $19,000 and incorporate the RRSP contribution into your overall remuneration plan. This way, you as the owner are funding your retirement from corporate profits at its maximum. Beyond the $105,556 salary, you may want to consider paying dividends. Since the corporation has already paid some tax on its profits, dividend income is a cheaper form of income from a tax standpoint because of the dividend tax credit deducted from an individual's personal taxes on dividend income.

8) If your corporation earns business income that doesn't qualify for the small business deduction, you'll need to consult with your advisor to determine whether it makes sense to pay out that income as a bonus or leave it in the company to be taxed there. The new taxation of dividend proposals will have a big impact on the usual rules of thumb for owner-manager remuneration.

9) If the company is planning to make some significant capital purchases including vehicles and equipment, the decision and acquisition should be made prior to year-end. This way, capital cost allowance can be claimed on the acquired assets for the fiscal year just ended and income reduced accordingly, rather than wait another 10 or 11 months to deduct the capital cost allowance if the purchase is delayed until January or February. Capital cost allowance on new capital purchases is generally half the normal rate in the year of purchase.

10) For those businesses that earn their income from contracts that may be in progress for months at a time, consider the timing of your billing around the year-end date to put your company in the best tax position. Such businesses often progress-bill. Billing the first week in January rather than the last week in December (assuming a December year-end) could result in deferring tax for a year on the billed income.

For further information, contact a Chartered Accountant.
 



Brought to you by the Institute of Chartered Accountants of Ontario.