The end of the year is approaching, and for owner-managers, it is an excellent opportunity to review your tax planning for 2017 and catch up on any tax proposals and changes that will impact business income, so you can plan appropriately.
Here’s a checklist to assist you with your tax planning for the 2017 tax year:
Create an effective dividend/salary mix.
As the owner of an incorporated business, you can choose to receive corporate income as salary or dividends. To determine what’s best for you (based on your 2017 tax year), you should carefully analyze the optimal mix of salary and dividends. This will depend on many factors, including your income level, payroll taxes, and maximum contribution for RRSP, etc.
Consider accruing salary or bonus.
Once you’ve decided on the appropriate salary or bonus, consider accruing the salary or bonus in the business at year-end but deferring the payment to yourself until the next year (up to 179 days after the company’s year-end). Assuming a December 31 year-end, the company gets a deduction in 2017, but source deductions do not have to be remitted until the salary or bonus is paid in 2018, and you don’t have to include the amount in your income until you file your personal tax return for 2018.
Consider paying a salary to family.
If you have family members who provide services to your incorporated business, you may want to consider employing them and paying them an appropriate and reasonable salary. Your company will get a tax deduction for the salary paid. A salary is considered “reasonable” if the services are genuinely being provided, and if the salary is similar to an arms’ length comparable.
Consider paying dividends to family members who hold shares in the company.
If you have family members who are also shareholders in your business, consider paying them additional dividends in 2017, before the new tax on split income regime comes into effect in 2018. Dividends paid to family members, especially ones aged 18-24, in 2018 that do not meet the new proposed “reasonableness test” will be taxed at the top personal marginal tax rate.
Carefully time the purchase and sale of fixed assets.
If your company has a depreciable asset you are thinking about selling, consider holding off on the sale until after your business’ 2017 year-end. This will allow you to claim capital cost allowance (CCA) on the asset for one more year.
On the other hand, if you’re considering buying any depreciable assets, try to acquire them before December 31, 2017. 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 allow you to claim CCA on the asset for 2017 at half of the CCA rate otherwise allowable. You will also be able to claim CCA at the full rate for all of 2018.
Consider repaying shareholder loans.
If you borrow money from your corporation at low or no interest, you are generally considered to have received a taxable benefit. Unless the loan is for a limited number of qualified purposes, it will be included in your income for tax purposes in the year it was advanced unless you repay it within one year after the end of the company’s taxation year in which the loan was made. For example, if your company has a December 31 year-end and it loaned you funds on October 1, 2016, you must repay the loan by December 31, 2017, to avoid paying tax on the loan amount in your 2016 personal tax return.
Prepare for 2018 tax changes.
Bear in mind that the way private companies and their shareholders are taxed will be changing in 2018. Major proposals were presented in a government consultation paper released this summer. As a result, owner-managers of private companies will need to re-evaluate whether it makes sense to pay dividends to family members in lower tax brackets in 2018.
Consult a chartered professional accountant before the end of the year to carefully review how these changes might affect your tax situation.