So, you own a small business, and we’re here to help you with some strategies to assist in your year-end tax planning. The two major challenges that you are going to face are tax and succession planning (Succession refers to nominating the next of kin for the business). When it comes to reducing your corporate income taxes, you have a lot of options in Canada. Let’s discuss some strategies to help lower your taxes and increase your residual corporate income.
Delay the sale of Assets until the year ends
If your plan is to sell capital assets, you should strongly consider delaying the sale until the next year if possible. Doing this will allow you to claim an additional year of CCA, as well as delay the inclusion of any recaptured capital gains and CCA in taxable income by an entire year. This applies to depreciable property, real property in the shape of capital property, and investments.
Capitalize on your Non-Capital Losses
If your business was struck by a non-capital loss (This is when your expenses exceed your income) in a given year, it is best to sit down and strategize about when the right time would be to use this to lower your corporate tax bill. Any loss that happened after 2005 may be used to offset other streams of income in any corporate tax year. How? Simply by carrying them three years back or 20 years forward. It’s often more helpful to carry your non-capital loss back to recover the income tax that you have previously paid. However, you can also carry it forward to potentially offset a larger corporate tax bill in the future. Clearly, both options are far better than using it in the same year the loss occurred.
Strategize Capital Cost allowance
Canada’s small business owners should know that it is in their best interest to deduct the cost of the acquired depreciable property over a specific number of years through a CCA (Capital cost allowance) claim, instead of deducting the cost normally through their business. Many business owners also do not know that they are not obligated to claim CCA in the year that it occurred. This is not a mandatory deduction, so feel free to use as much or as little of your CCA claim in a given tax year. A key reason for not using all the CCA claim is so that you may carry forward the unused portion to help offset a bigger income tax bill in the future. It would be unwise to claim the full CCA amount in a year that has relatively low taxable income when the ability to carry it forward exists. There is also another major way to capitalize on CCA, buying and selling your assets at the right time. More specifically, this means buying new assets by the end of the year and selling old assets after the current year. An important thing to note is the 50% rule: If you acquire an asset, you may only claim half of the CCA. In certain cases, there’s an “available for use” regulation indicating that one cannot claim capital cost allowance until the second tax year of having acquired an asset.
Incorporate your business
There’s a reason why so many sole proprietors and partnerships get their business incorporated; the valuable tax benefits. The best of these advantages is the small business tax deduction; a special reduced rate applied to income generated by a qualifying Canadian held corporation. For a Canadian-controlled private company that claims the small business tax deduction. Although this seems like a great opportunity, it’s important to understand that your business needs to be generating enough income for the incorporation to be worth it monetarily. So, there’s the fact that you need to have a good income to offset the costs of incorporation, but you also need to store a substantial amount of your earnings in the corporation to take advantage of the corporate tax deferral.
To illustrate the mistake mentioned above, we can look at the following example. If you are managing an incorporated business that generates $80,000 in a year, and you take that amount from the corporation as a salary, the $80,000 is then taxed as a personal income rendering the incorporation process and tax benefits pointless.
Annual planning – SBD Restriction
There are several restrictions in place that limit access to SBD (Small business deductions). Some recent changes to tax regulations have expanded the number of restrictions even more. For the tax years after 2018, your business faces new restrictions. The SBD restrictions are based on the earned AAII of the previous year. Annual planning would make sense in a case where the AAII amount rises or drops year to year. With this sort of careful planning, the following year’s SBD can be managed. There are some strategies for reducing the investment income within your corporation while still retaining the investment funds within the organization. This is done in this way because withdrawing these funds would impose a tax. Of course, this decision will have to be accounted for by different factors and make sense for your businesses’ specific strengths and needs.
Another option to consider is investing excess funds into an exempted life insurance policy. This will be of benefit because income put into an exempted life insurance policy is not included in AAll.
To get maximize the advantages available to your small business, start the process in advance and preferably under professional guidance. All the strategies outlined above will get your company in a better position to take care of your income tax for the years to come. Consulting a small business accountant is also highly recommended to ensure no potential opportunities are missed while preparing for your corporate tax returns.