March 2, 2019 — Running a business is no easy feat! And with tax season here, we know how overwhelming it can get. Taxes are complex, and it can be challenging to understand all the intricacies involved in tax preparation.
To help make things a bit simpler for you, we met with our accounting, advisory and tax service sponsor BDO Canada, and got some tax tips that can help growing companies when they are entering the tax season. Before you start filing your returns, sit down and ensure you understand all of the following tips to help make the process a little more straightforward. Whether you’re getting ready to file your corporation tax return by yourself or with an advisor, we’ve got your guide for tax preparation.
Pay your family wisely
As a private business owner, you know the value of revisiting your family business remuneration strategy at least annually. In determining the best mix of salaries and dividends for you and your family members, consider factors such as each individual’s marginal tax rate and need for cash, as well as the corporation’s tax rate and benefits of deferral.
Since 2018, this process has become more complex due to the expansion of the tax on split income (TOSI) rules. The expanded rules further restrict the use of a private corporation to split income with family members. They do this by applying a high rate of tax to certain types of income, in particular dividends paid from private corporations. When these rules apply, they eliminate the benefit of income splitting. However, there are situations where you can still split income in a tax-efficient manner with family members, but the rules are complex and it is best to discuss any potential strategy with your tax advisor.
Understand the small business deduction
The small business deduction (SBD) reduces the corporate tax rate for qualifying businesses and therefore creates a greater deferral of tax than for business income taxed at the general corporate rate. As such, the SBD is one of the most common tax advantages available to Canadian-controlled private corporations (CCPCs). The small business limit is currently $500,000 federally and in all provinces and territories except Saskatchewan (where the limit it $600,000). In 2019, the combined corporate tax rate on income up to the small business limit is 16 per cent or less in all jurisdictions — at least 11 per cent lower than the general corporate tax rates, and as much as 19 per cent lower in some jurisdictions. This allows for a significant tax deferral where active business income is retained in the company.
Purchase capital assets before year-end
If you’re planning on purchasing capital assets for use in your business in the near future, you should consider doing so before the end of your fiscal year. If assets are acquired and in use before your fiscal year-end, you can claim one-half the usual amount of tax depreciation, or capital cost allowance (CCA), to reduce your business’ income in the current fiscal year. Even if your business is likely to be in a loss position this year, purchasing the asset before year end will allow a full year’s CCA claim next year. Bear in mind that title to the asset must be acquired and the asset must be available for use in the current fiscal year in order to claim CCA this year.
Consider delaying the sale of assets with accrued gains until after year-end
If you plan to sell capital assets with accrued gains, you should consider delaying the sale until the start of your business’ next fiscal year. This will not only allow your business to claim one additional year of CCA but will also postpone the inclusion of any recaptured CCA and capital gains in taxable income by one year.
Know your deadlines
Tax penalties for mistakes are particularly difficult for new entrepreneurial companies just getting off the ground. It is important to file your corporation’s tax return no later than three years after the end of the tax year. If your corporation is expecting a tax refund or is claiming a dividend refund, remember to file your corporation’s tax return no later than three years after the end of the tax year in order to receive it. Under the Income Tax Act, if a return is not filed within three years of the end of the taxation year, the related refund or dividend refund is no longer available. The provisions that allow the Canada Revenue Agency the discretion to issue refunds to individuals and graduated rate estates after the three year limit if the return is filed within 10 years of the year-end, do not apply to corporations.
BDO Canada helps our entrepreneurs succeed by providing them with accounting, advisory and tax advice specifically tailored to small but growing companies. If you’re looking for more information, or wondering how BDO can help your business, contact Brian Laberge at firstname.lastname@example.org.