While 2013 is almost over, many tax planning opportunities are still available. As an owner-manager, you can still act quickly to reduce taxes for yourself and your incorporated business this year.
These tips assume your corporation has a December 31 taxation year-end.
Even if it doesn’t, you can still use these ideas to maximize personal tax savings in 2013 and whenever your business’ year-end comes up.
Consider Accelerating Payment of Non-Eligible Dividends Into 2013
The increase in the federal tax rate on “non-eligible” dividends in 2014 creates an opportunity for tax savings on non-eligible dividend income if dividends are paid out in 2013 (instead of 2014).
“Eligible” dividends are paid to individuals by public corporations and Canadiancontrolled private corporations (CCPCs) out of business income that has been taxed at the high corporate tax rate. Any other dividends are non-eligible, including dividends paid to individuals by CCPCs that pay tax at the small business rate.
Ontario individuals with income between about $135,000 and $509,000 can realize federal and provincial tax savings of 2.35 per cent by receiving non-eligible dividends in 2013 rather than 2014 – those over $509,000 can save 2.13 per cent.
Timing your asset sales and purchases
If your company has a depreciable asset and you’re thinking about selling, that will be subject to recaptured depreciation, consider holding off on the sale until after your 2013 corporate year-end, as long as it makes sense for your business.
That way, you'll be able to claim capital cost allowance (CCA) on the asset for one more year. You'll also defer the recapture arising from the sale until 2014.
On the other hand, if you're considering buying any depreciable assets, try to arrange to acquire them by December 31, 2013 (assuming your company has a December 31 year-end).
As long as you can actually put the asset to use in your business this year, acquiring the asset just before the company’s year-end will accelerate the timing of your tax write-off.
Planning your most tax-effective dividend/salary mix
As the owner of an incorporated business, you can choose to receive income as salary or dividends. To maximize your tax savings for 2013, you should carefully analyze the best mix of salary and dividends for you, which will depend on many factors including:
• Your cash flow needs
• Your income level
• The corporation’s income level
• Payroll taxes on salary
• The level of the corporation’s taxable income.
R&D tax credits
If your company claims R&D tax credits, you may want to pay yourself enough salary or bonus to keep the company’s taxable income at or below the federal small business deduction limit of $500,000.
You may also want to pay yourself enough salary to allow the maximum possible contribution to an RRSP. The same goes for any family members you’ve employed (see below).
The maximum contribution is 18 per cent of the previous year's earned income.
Repaying shareholder loans
If you borrow money from your corporation at low or no interest, you are considered to have received a taxable benefit from the corporation equal to the Canada Revenue Agency's (CRA) current two per cent prescribed interest rate, minus any interest you actually pay during the year or within 30 days after the end of the year.
Unless the loan is for a limited number of qualified purposes, it will be included in your income for tax purposes unless you repay it within one year after the end of the company’s taxation year in which the loan was made.
Employing your spouse and children
Consider having your company pay a salary to your spouse and/or children. The salary must be reasonable in light of the services they perform for the business.
Such services might include:
• Filing and other administrative work
• Business development planning
• Acting as a director for the corporation.
The CRA can be fairly flexible in interpreting what constitutes a reasonable salary, provided services are genuinely being provided. Note that the cost of payroll taxes, Canada Pension Plan contributions and Employment Insurance premiums should be weighed against potential tax savings expected.