Published: March 6, 2020
Last Updated: October 25, 2021
Top 2016 Year End Income Tax Planning Tips by Canadian Tax Lawyer Part 5
Part 5 of our Canadian tax lawyer year end tax planning article discusses tax planning opportunities for small business owners.
Best Income Tax Planning Tips for SME Business Owners
The most opportunities for tax planning are available to taxpayers who carry on business, personally or through a corporation and this is where our expert Canadian tax planning lawyers can help reduce overall taxes paid by the owner and the SME business.
Crystallize your Goodwill
The effective tax rate on the sale of goodwill is increasing from as little as 13.5% to over 50% due to a tax change in the method of taxation of goodwill. By carrying out a crystallization reorganization of your eligible capital property (goodwill) before the end of December you can benefit from an overall absolute tax savings. Speak to one of our experienced Canadian tax lawyers right away if you have goodwill in your SME business.
Pay Salaries to Spouse/Family Members
Business owners are entitled to pay reasonable salaries to family members who work for the business. This is an effective method of splitting income and bringing down the overall tax rate. It also provides family members with contribution room in their own RRSPs.
Salaries must be reasonable in the context of the tasks the family members actually perform. Proper books and records are required in case of an audit in the future, so taxpayers should ensure strict compliance with the record keeping requirements of the tax act to avoid future unexpected tax problems.
Shareholder Loans from Corporation
A shareholder loan from a corporation has to be brought into income of the shareholder if it is outstanding for 2 corporate year ends. Make sure that any shareholder loans are repaid before this deadline.
Capital Gains Rollover on Small Corporation Shares
Individuals who disposed of shares of an eligible small business corporation are eligible for a tax free rollover of those proceeds of sale provided that shares of replacement eligible small business corporation were purchased during the year or up until April 30 of the following year.
Small Business Deduction
Canadian Controlled Private Corporations (“CCPC”s) with active income (business income not investment income) of up to $500,000 are permitted to utilize the small business tax deduction which reduces the rate of taxation on that active business income. A key tax strategy for corporations with active business income in excess of $500,000 is to declare a bonus to the owner managers of the company to reduce income to $500,000. The bonus must actually be paid within 180 days of the company’s year-end and all payroll deductions must be withheld and remitted.
Allowable Business Investment Loss “ABIL”
If a taxpayer incurs an allowable business investment loss (ABIL), which is a loss on an investment in shares or a debt of a small business, the ABIL is available to reduce overall taxable income, not just capital losses as with a regular capital loss. In order to claim an allowable business investment loss or ABIL ensure that shares have been sold or clearly establish the write-off of an investment bad debt that is regarded reasonably as being uncollectible.
Optimize Your Compensation Mix Strategy
The compensation strategy for an SME normally involves a combination of salary, bonuses and dividends. Bonuses allow payment to be deferred until after year-end. Consult with our knowledgeable Canadian tax lawyers to tax plan your compensation mix.
Timing of Expense Deductions
Taxpayers in business should accelerate expenses to make purchases that can be deducted this year rather than waiting for the new year. Employees are entitled to write off depreciation on cars, planes and musical instruments. Tradespersons and apprentices are permitted to deduct the cost of their tools up to a prescribed limit. Taxpayers planning on these types of purchases should do this year to enjoy the benefit of depreciation claims this year.
Plan to purchase any capital property before the tax year-end to be able to claim CCA deductions (at 50% of full rate) this year.
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"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."