Imperatives of Corporate Tax Planning for Small Businesses in Canada
August 6, 2020 | Written by: Sohail Afzal
‘Corporate Tax Planning’ is an attempt to reduce tax liabilities using different tax reduction strategies. To get the most out of your tax strategies, you need to start the tax planning process well before the end of the fiscal year. Writing-off assets, bonus declaration, and the investment in RRSP account are some of the important tax strategies that will help business owners to reduce their tax obligations significantly. Here are some of the important tax strategies that a small business owner must keep in mind while planning for corporate taxes.
‘Bonus Declaration’ at the end of the fiscal year and not paying it off in the same year is one of the useful strategies for tax reduction. If you have decided to declare a bonus of $50,000, it will be recorded as bonus expense in the income statement and also recorded as bonus payable in the Balance Sheet. Without actually paying a bonus, your corporation can claim a tax deduction for $50,000 when filing the corporate income tax return.
As a private business owner, you must revisit your family’s business remuneration structure on an annual basis. You need to determine an ‘Optimal Remuneration Strategy’ for your family to minimize the corporate tax liability on your business. Whenever you pay salaries and dividends to your family members out of your business’s income, you need to make sure that withholding income tax, CPP, EI, and any other provincial payroll taxes are remitted to the CRA as required. The remuneration and other related details must be mentioned in the T4 slips. The salary amount of your family members must be reasonable and it should be commensurate with services performed by them.
‘Small Business Deduction’ (SBD) reduces your corporate tax rate and it is one of the most common tax advantages that are available to Canadian-controlled Private Corporations (CCPCs). The reduced tax rate is available on active business income up to the corporation’s business limit for the year. The federal business limit is $500,000 to be eligible for SBD. But there are certain restrictions that have applied to limit access to the SBD.
If you have the intention to acquire capital assets for your business; tax consultants would prefer you to purchase them before the end of your fiscal year. You can get a claim equal to one-half of the usual amount of ‘Tax Depreciation’ or ‘Capital Cost Allowance’ (CCA). It will reduce your business income in the current fiscal year and your business’s tax liability will automatically reduce. If your business is showing an operational loss during the current fiscal year and you have procured a capital asset in that year, you can get full year’s CCA claim in the next year. To get the CCA claim against the capital asset, it is necessary that an asset you procured must be available for use in the current fiscal year.
On the contrary, if you plan for ‘Disposing of a Capital Asset’, tax consultants would recommend you delay the disposal of your capital assets till the start of the next fiscal year. This will have double benefits; it will allow your business to claim one additional year of CCA and will also postpone the inclusion of any capital gains in the taxable income by one additional year. Moreover, if you have investments in real estate or in the stock market and you are expecting capital gains, you must defer all your planned dispositions till the beginning of the next fiscal year.
‘Investment in the RRSP Account’ is also considered as tax-deductible. For most Canadians, RRSP is not only an investment tool but it can also minimize your tax liability. It is amazing that RRSP is not only a tax-deductible but also a tax shelter tool. When you consider paying a bonus to yourself and you contribute the same bonus amount to the RRSP account, there will be no income tax on the bonus income received. This is because the RRSP deduction will wipe out the tax payable on the bonus income.
One of the amazing tax strategies that are being used by many business owners in Canada is to arrange a social event for your employees and incur an expense on staff ‘Meals & Entertainment’. Tax-deductible limit of 50% on Meals & Entertainment becomes 100% when you spend on staff Meals & Entertainment. But the condition applies in this perspective is that social event is generally available to all of your employees. The Canada Revenue Agency indicates that if your business provides free parties or other social events to all employees and the cost is greater than $150 per person, it will be considered a taxable benefit to the employee as well.
Lastly, tax consultants would always suggest business owners invest in ‘Tax-efficient Investments. On equity investments, 50% of the gains realized on the sale of shares would be taxable whereas investment income earned on fixed income bonds is fully taxable. Therefore, you need to strategize your investments in different investment portfolios keeping in mind the tax implications of such investment for your business.
GTA Accounting Professional Corporation is a Chartered Professional Accounting firm. You can put the burden of your corporate taxes on our shoulders as we are professionally trained for handling all the complex matters of corporate taxes. We can also strategize to reduce your corporate tax liability by complying with all applicable tax laws of the CRA in a befitting manner.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.