Tax management is very critical, especially for small and
medium-sized businesses. This article provides many
year-end tax tips for 2014 that you can take advantage
of to save your business more money.
1) Withdraw funds from your corporation in a Tax-effective manner:
Salary and/or Dividends
Pay Salary /Bonus from the corporation:
- Salary/bonus constitutes as “Earned income” and creates RRSP contribution room.
- Salary/bonus is tax-deductible which reduces corporate tax payable.
- Income-split with family members who are employees (i.e. related employees – spouse, child) by paying them salary/bonus which will reduce corporate taxable income, and hence, corporate taxes. If the related employees do not have any income, amount equaling to their tax credits such as Basic Personal Amount and Canada Employment Credit will be tax-free (i.e. no personal tax consequences).
- Pay into Canada Pension Plan which may be an important retirement strategy for you.
- In comparison to dividends (which is taxed at a lower rate), receiving a salary/bonus can result in greater personal tax as it is fully taxable.
- The corporation will be required to pay both portions of CPP (i.e. employer and employee portions).
- More administration is required since CPP and income tax have to be remitted to the CRA monthly and T4 slips are required to be filed annually.
Pay Dividends from the corporation:
- Dividends are taxed at a lower rate than salary/bonus, which can result in lower personal tax.
- If the taxpayer has no other personal income, a certain amount of dividend income will be tax-free to the payee. Therefore, if funds are required, and your spouse has no other income, consider also adding your spouse as a shareholder and paying him/her dividends.
- The corporation is not required to make monthly remittance to CRA for CPP. Less administration work is required and more cash available is for the corporation.
- Dividends are paid out from after-tax profits and thus, does not reduce corporate taxes.
- Dividends do not constitute as “Earned Income” and hence, does not create RRSP contribution room.
- Dividends also do not provide opportunity for other personal income tax deductions such as childcare expense deductions.
Mixture of Salary/Bonus and Dividends
- If the taxable income exceeds the $500,000 threshold, salary/bonus can be paid to reduce the taxable income to $500,000. Dividends can also be paid by the corporation to the shareholder if more cash is required.
Whether you obtain salary/bonus or dividends from the corporation will depend on the personal financial situation of the owner/shareholder/ family members. Factors such as cash flow need, personal and corporate income level, source deductions and payroll taxes on salary/bonus need to be considered.
Other methods of obtaining funds from the corporation:
- Make capital dividend payments to shareholders which is tax-free. When a capital gain is incurred by the corporation, the non-taxable portion is added to the capital dividend account for a private corporation, and can be paid out tax-free as a capital dividend.
- Have the corporation repay the shareholder loans or charge the corporation interest on the loan. The interest income earned would be subject to personal tax like salary, but no source deductions/payroll tax are required to be made.
- If large amount of capital was initially invested into the corporation, funds can be extracted from the corporation tax-free to reduce the paid-up-capital. Shareholders can be repaid the capital amount tax-free as long as it is less than the paid-up capital of the corporation.
2) Repay shareholder loan or charge interest as an expense:
- Ensure you repay shareholder loans from the corporation within one year after the year end of the corporation in which the money was borrowed. This will avoid inclusion of the loan amount as income on the personal tax return (unless specifically excluded through other provisions).
3) Accrue Salary/Bonus before Year-end:
- If salary/bonus is to be paid, the amount can be accrued before the year-end in order to benefit from corporate tax savings. The salary/bonus payment does not have to be made immediately, and can be paid within 179 days from the year-end, thus deferring personal taxes.
4) Maximize CCA on Assets:
- Increase capital cost allowance (CCA) claim on assets by buying depreciable assets and putting them into use before the year-end.
5) Defer Disposition of Depreciable Assets until after Year-end:
- Consider selling or getting rid of depreciable assets until after year-end if recaptured income will result.
6) Increase Business Expenses (reasonably):
- Consider the corporation’s near future requirements (ex. repairs, advertising), and obtain them before the year-end to have higher business expenses and reduce corporate taxes for the current year.
Effective tax-planning is necessary and always beneficial. Implementing these year-end tax tips for 2014 will help you to decrease your taxes and save more of your hard-earned money.
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.