The Competitive Edge for Small Business Owners
Year-End Tax Plan Tips for Small Business Owners
As a small business owners, you have extra “person” with tax implication – “Corporation”. Corporation has more tools to keep taxable income skinny than employees who morally only have charitable donation and RRSP contribution tax tips to save tax. It is suggested to make a general tax plan by yourself using the following list for this tax year and the next.
- Do not miss the deadlines
- Move up your tax deduction
You may want to reduce your tax bill by moving up as many as deductible expenses as possible. Maximizing Capital cost Allowance (CCA) deduction can be helpful to reduce taxable income. If you are considering purchase capital assets in near future, it is better to acquire the title of the assets before year-end, one and half the usual CCA can be claimed in current year. Even you are in loss position of this year, purchasing capital assets before year end will allow you claim full CCA for the next year.
- Complete transaction of eligible capital property(ECP) before Dec 31, 2016
On January 1, 2017, new rules are set out to tax gain for selling eligible capital property (ECP) at high rate of 38.67% at federal level. Compared to gain for selling ECP used to be taxed 11% for CCPC at federal level, the change is significant. ECP assets are generally include goodwill and other intangible assets such as incorporate costs, custom lists, farm quotas, franchise and licence with an indefinite life time. If you are considering selling the kind of assets mentioned above, you’d better contact a CPA to take steps to complete transition before Dec 31, 2016.
- Utilize lifetime capital gain exemption
The capital gains deduction can be claimed with respect to three types of property: qualified small business corporation shares, qualified farm property and qualified fishing property. The capital gain exemption amount increased to 842, 176 C$ for 2016 tax year. Lifetime capital gain exemption amount increased a lot in recent years. If you have trigged gain on a kind of assets mentioned above and utilized lower exemption amount, you can enter similar transaction to use up the additional exemption available.
- Pay an attention to debit balance of shareholder loan on balance sheet
If you withdraw money from your corporation throughout the year, it will be treated as shareholder loan. For example, Bill owe 100% shares of Bco with year end of Aug 31. Bill withdrew 50,000 C$ on 2014. The deadline to pay 50,000 C$ shareholder loan back to Bco is Aug 31, 2015. Bill should use salaries or dividend payments to clear the shareholder loan before deadline. If salaries or bonus were paid, the payments are deductible at corporate level and would increase Bill’s RRSP contribution next year. If dividends were paid, Bill would enjoy dividend credit for his personal tax. However, if Bill did clear shareholder loan with salaries or dividends before the deadline, the shareholder loan would be deemed as his revenue on 2015. In this case, Bill will loss the benefits of dividend tax credit and salary expense deduction.
- Pay reasonable salaries to family members before year-end
If your spouse or children work for you, consider paying them salaries. Salaries payments are deductible at corporate level and taxed on their hands. It will provide family member with earned income for RRSP contribution.
- Pay dividends from your corporation
Corporation can be used to split income between family members. If your spouse or child who are over 18 years old, subscribe to company’s shares at fair market value, they are entitled to receive dividends from the after-tax income of the corporation. They can enjoy dividends tax credits when they file personal tax. On the other hand, if company pay tax on Aggregate investment income (AII) in previous year, paying dividends by corporation before year end could generate tax refund on this kind of tax.
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