Year-End Tax Strategies

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TAXATION

year-end-tax

It’s never too early to start planning your year-end tax strategies.

For many businesses, the month of October signals
that the end of the fiscal year is not far away. Realizing
that December 31 is fast approaching should
prompt you, as an owner-manager, to review your
year-to-date corporate and personal data and start
putting your tax strategies into place. At the same
time, remember to set up a meeting with your CPA.
(Corporations can have a fiscal year end other than
Dec. 31; this would, of course, affect the timing of
the year-end meeting.)

Remuneration

Five main issues affect remuneration and taxation:

  1. Was a bonus or dividend declared during the fiscal
    year but not paid until the following calendar year?
  2. How much remuneration did you receive through
    normal salary or wages in the calendar year?
  3. Were the draws or loans taken by a shareholder
    or related party during the company’s fiscal year
    fully repaid to the company in accordance with
    the requirements of the Canada Revenue Agency
    (CRA)?
  4. Are any draws or loans taken between the corporate
    fiscal year end and the end of the calendar
    year to be included in your taxation year?
  5. Will any discrepancies between the corporate fiscal
    year-end date and the timing of payments and
    repayments of draws or loans impact your taxable
    income?

Have your CPA tax advisor review both your corporate
and personal records to bring you up to date on the tax
rules and their potential impact on taxable income.

Corporate Income

Now is the time to carry out a cursory review of the
corporate profit or loss to determine whether the level
of corporate taxable income suggests paying you a
bonus. Should profits be paid to you and your employees
to reduce or eliminate corporate taxes? Depending
upon the individual’s marginal tax bracket, reducing
corporate tax by means of bonus payments is a great
tax strategy; however, where corporate or personal cash
flow is problematic, it may be more astute to pay the
corporate taxes rather than pay or defer the additional
remuneration required to reduce the corporate tax to
zero. It is certainly feasible to pay the owner-manager,
withhold the appropriate deductions, and then have the
owner-manager lend the balance to the company. However,
consideration should also be given to the “Due
to Shareholder” account. If it becomes too large, the
company may have difficulty repaying this “tax-paid
loan” to the shareholder(s).

Family members’ remuneration
is often overlooked as a means
of reducing corporate profit.

A CPA may also provide guidance regarding payment
to the owner-manager’s family members who supply
services to the company. Often family members’ remuneration
is overlooked as a means of reducing corporate
profit without the need to accrue corporate profits
to the owner-manager(s). The appropriate allocation
of remuneration among family members may assist
in maintaining a lower tax rate for all family members
and thereby collectively leave more take home
pay. Where there is more than one owner-manager,
there may be a need to review the structure of owner-
manager payout packages to maintain a harmonious
relationship among all concerned.

In addition to the normal streams of income for the
company, your CPA will be able to help determine
whether regular dividends or capital dividends (if
available) should or could be declared and paid.

Deductions from Personal Income

This time of year is also a great time for your CPA to
combine a review of corporate profits and potential
personal income with a review of potential deductions.
Your CPA will review “employment” income and
determine whether there are major deductions that
should be taken advantage of to reduce personal taxable
income. Major deductions that may be reviewed
include:

  • Registered Retirement Savings Plan (RRSP) contribution
    room (considering any Pooled Registered
    Pension Plan (PRPP))
  • capital losses from prior years if any capital gains
    have been earned
  • investment portfolios (considering gains or losses
    from current or prior years)
  • profits or losses from other business ventures such
    as personally held rental property or partnership
    ventures
  • non-capital losses from previous years that may
    be applied against current-year income
  • potential for income splitting should you or your
    spouse receive a pension from previous employment
    plans
  • portfolio management costs incurred for your
    personal investments.

The Right Thing to Do

Tax planning for owner-managers involves more than
just determining taxes payable. When reviewing and
discussing your business and personal income issues
with your CPA, you should be able to determine the:

  • impact of various income scenarios on current
    personal taxable income
  • impact of various corporate payout scenarios on
    current corporate income tax
  • cash flow requirements for both the owner-manager
    and the company when various hypothetical
    amounts and types of remuneration are calculated
  • cash flow requirements for the corporate entity to
    pay out deferred bonuses, any resulting withholding
    taxes, or corporate taxes
  • taxable income issues that may arise for owner-
    managers for the next calendar year, such as:
  • additional income as a result of investment
    portfolio changes
  • balances in RRSPs or TFSAs that could determine
    investment strategies
  • age change (e.g., turning age 65) that could
    create income from Old Age Security, CPP or
    other pension plans
  • number of years remaining before you need to
    roll your RRSP into a RRIF or an annuity
  • changes in the company’s shareholder list
  • changes in family member status as a result of
    divorce, death, retirement, resignation or new
    family members joining the company in some
    capacity (e.g., as employees or shareholders)
  • anticipated sale of assets or investments.

Productive Talk

The long-term relationship of your CPA with the
company, the owner-managers and family members
allows meaningful discussions that will provide a level
of satisfaction not only for the company and the owner-
managers but also for your CPA, who takes pride in
seeing you and your business succeed.

 

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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