On my first day with the firm, someone told me “Cash is King”. Those are words to live by for an accountant — I know I will never forget them. To help you monetize your cash flow, there are a number of tax planning strategies that could yield substantial benefits.
Recover overpaid taxes
Ensure to review your tax installments; opportunities may be available to help reduce or defer tax installment liabilities. Savings may arise by switching the method used to calculate your installments; for example, it might be more advantageous to base your tax installments on the lower of the previous year’s and current year’s estimated taxes. If you find that your company has overpaid its installments, you may transfer the excess to another account or be in a position of a refund.
If your corporation is a Canadian controlled private corporation (CCPC) and, among other conditions, its income (together with related companies) for the current or previous year does not exceed $500,000, it may qualify to make installments quarterly instead of monthly.
Maximize tax credit claims/recoveries
Is your company missing out on any tax recoveries or investment tax credits that it is entitled to receive? There may be opportunities for your company to obtain refunds of sales or other indirect taxes paid in error. Your company may be conducting innovative activities that could qualify for investment tax credits for scientific research and experimental development (SR&ED). Your company could also be eligible for employment-related labour tax credits, including a co-op education tax credit of up to $3,000 per qualifying employee, an apprenticeship training tax credit of up to $10,000 per eligible apprentice, as well as a graduate transitions tax credit of up to $4,000 for every graduate you hire. A review of your company’s activities can help you make sure any potential tax refund opportunities have not been overlooked.
Using tax losses to your company’s advantage
If your company has assets or investments that have declined in value, you may wish to sell them to realize the underlying losses (bearing in mind that tax considerations are only one of many factors that can influence your investment decisions). The capital losses can be used to offset any taxable capital gains realized in the current or one or more of the last three taxation years.
If you sell assets and plan to reacquire them shortly after selling them to recover value, beware of the special tax rules designed to stop the artificial creation of tax losses. Careful planning and timing is critical.
Capital dividend account pay-outs
If your company is a Canadian controlled private corporation and you are now considering techniques to realize capital losses, bear in mind the impact on your company’s capital dividend account balance. The capital dividend account represents the untaxed portion of capital gains and losses realized by your corporation. Any amount in the account can be paid out entirely tax-free to your shareholders if a timely election is filed.
One-half of capital losses realized reduces the capital dividend account. As a result, if possible, you should be sure to pay out the entire positive capital dividend account balance to your private corporation’s shareholders before you take steps to realize a capital loss.
Any change in your company’s financial situation warrants a review to determine the related tax implications. Tax is a business expense that directly affects your bottom line. It is advantageous to think of tax planning as an investment, not a cost. Effective tax planning can help you preserve or improve your cash position – after all “Cash is King”