Year-end is just around the corner. If you haven’t already, now is the time to talk to your accountant and see what you can do to optimize your taxes. Some tax strategies can be applied immediately, while others require you to plan ahead of time. Here are 7 year end business tax planning tips to keep in mind.
Optimal salary/dividend mix
Consider paying yourself a salary or dividend before the end of the year. This is particularly beneficial if you do not have other sources of personal income to utilize the basic personal amount and have the additional income taxed at a lower tax bracket. To determine the optimal mix of salary and dividend, you should compare the after-tax cash flow and consider the pros and cons of each option.
Income splitting with family member
Splitting income with a family member used to be easy. In the past, your family member can simply subscribe to the shares of the company which would allow you to pay them a dividend at your discretion. The law made effective on January 1, 2018 has made it harder to achieve income splitting.. You now need to prove the contribution made by each individual who received dividend from the business. This is known as the Tax On Split Income (TOSI) rules, There are situations where you can still split income in a tax-efficient manner with a family member. However if your family members do not meet those exceptions, the split income they received will be taxed at the highest marginal rate.
TOSI rules are mainly targeted at family members receiving a dividend. If you pay them a salary, there is a separate test you must meet to ensure the amounts paid are reasonable based on the services performed. A good rule of thumb is to pay them what you would have paid a third party and to maintain adequate documentation to support all payments.
Buy capital assets before year end
If buying capital assets is part of your strategic plan to grow the business, consider buying them before the company’s fiscal year end. Your business can claim one-half the usual amount of tax depreciation to reduce the overall business income, as long as the assets are acquired and in use before year end. Even if your business is in a loss position, you can increase the loss which can be carried forward for 20 years to offset against future years’ income.
Impact of investment income on SBD
If your operating business is earning investment income, you should consider its impact on the company’s Small Business Deduction (SBD). SBD is a preferential tax treatment that reduces the corporate tax rate on the first $500,000 of profit each year for qualifying businesses. It creates a tax deferral of at least 9% in comparison to businesses taxed at the general corporate rate.
However with the tax regulation changes in 2018, small businesses earning investment income over $50,000 will be subject to a reduction in the amount of SBD that can be claimed. Under this rule, the small business limit will be reduced by $5 for every $1 of investment income above the $50,000 threshold. In effect, the SBD will be eliminated when investment income reaches $150,000 in a given tax year. These investment income include, but are not limited to, interest, rent, royalties, portfolio dividends, and capital gains.
Postpone sale of assets with accrued capital gains
A great year end business tax planning tip is to delay selling investments with capital gains until the following year. This is because the business is not required to pay tax on accrued gain until the assets are ultimately sold. If it is a depreciable asset, your business can claim one additional year of tax depreciation and postpone the inclusion of any recaptured tax depreciation and capital gains in taxable income by one year.
Arrange a holiday party
Another year end business tax planning tip is having a company holiday party. It not only boosts employee morale, but the expenses are fully deductible. The 50% limitation on tax deduction that are generally applicable to meals and entertainment do not apply to employee social events. As long as the event is available to all employees and you don’t exceed six such events then the expenses are fully deductible.
Also, you should consider the tax implications for your employees. If the cost is less than $150 per person, the event will not be considered a taxable benefit to the employee. Note that ancillary costs such as transportation are not included in the $150 per person amount. However, if the cost of the party exceeds $150 per person, the entire amount, including the ancillary costs, will be a taxable benefit to the employee.
Monitor shareholder loan balance
If you ever used business funds to pay for personal needs or have taken a loan out of the business, you may be at risk of the shareholder loan rules. When a shareholder owes the business financially and does not repay the outstanding balance within a year, the amount will be included as income on shareholder’s personal tax return in the year the loan was made without a corresponding tax deduction for the business. In effect, you are being double taxed. To avoid violating the shareholder loan rules, you must monitor the shareholder loan balance at minimum on an annual basis.
On the flip side, if the business owes you money, you should monitor the shareholder loan balance due to its tax benefits when taking money out of the business. Withdrawing funds using the shareholder loan account should be prioritized over salary and dividend because it is completely tax-free.