If you are a small business and want to have a relatively seamless and smooth tax planning before the year ends, there might be some changes that you might want to make. Learn from the experts about the year end tax planning tips for small businesses.
Organize, Establish and Update Accounting
Keeping your paperwork and accounting organized is a natural starting point for effective tax planning. Many small businesses save all their bookkeeping/revenue and expense tracking until the end, which often leads to missed deductions and higher taxes (not to mention unnecessary stress). Reviewing the state of your filing system and possibly creating a paperless office could be a worthwhile goal that could save you a lot of time, space, and hassle in the long run. Now is the time to check any unopened government mail from Revenue Canada (CRA) or Revenue Quebec (RQ) for missed deadlines and/or overdue payments that have resulted in interest/penalties. There are several reasons why the CRA or RQ may send you a letter including a request for documentation to support a claim or to notify you of a change in reporting deadlines. They may even send you a refund check! (Although it’s certainly rarer). Government announcements are often somewhat cryptic or erratic. In this case, it’s a good idea to speak to your accountant, who should be able to provide valuable advice, as you don’t want to be caught with an arrears that continues to accrue interest, or worse, have your bank account frozen.
Talk to a tax consultant and seek tax preparation services for leverage these tips better.
Make Installment Payments
Many business owners ignore repayment notices at their peril and then find themselves hit with significant amounts of interest (Quebec yields can be particularly punitive) that can easily be avoided. It is important to assess what types of fees you may owe and make payments before the due date if possible. This includes HST/GST and QST and personal income tax if you are a sole proprietor or an unincorporated company. If you are registered, you may also owe corporation tax.
The CRA and RQ will generally tell you the exact fee amounts and due dates for personal tax returns, which include small unincorporated businesses.
HST/GST and QST charges must be determined manually based on the previous year’s submissions. If you have GST/HST and/or QST that exceeds $3,000 in the previous year, you must pay quarterly installments equal to 1/4 of the previous year’s amount. Corporation tax is also based on the $3,000 or more threshold from the previous year.
Pre-Purchases of Inputs and Capital Goods
If you are considering a major purchase, such as a new computer, an office chair with a more ergonomic frame, or perhaps you need some office supplies or important software and your New Year’s Eve falls on December 31st, it may make sense to make these purchases before the end of the year. If you have the cash flow necessary to make these purchases, you’ll be able to spend all or at least some of the purchases, reducing the taxes you pay. It should be noted that high value items such as chairs and computers are considered capital assets that cannot be fully expensed in a year but must instead be written off. The advantage is that no matter when you buy it during the year, you can get the first year’s depreciation.
Announce Bonuses at the End of the Year
You and your staff have worked hard and deserve to be rewarded. Assuming your business has been profitable and you have sufficient cash flow, awarding employee bonuses is a great way to reduce year-end profits and subsequently taxes payable. The CRA allows bonds to be declared in the current fiscal year and paid out in the following year, as long as it is within six months of the date of declaration. The advantage of reporting bonuses in the current tax year, but not paying them out until the following year, is that the company gets the benefit of the tax deduction immediately, while the employee only has to report it as taxable income in the following year.
Invest Funds Directly Through Your Corporation
If you are an incorporated business and are lucky enough to earn more than you need for your personal needs, it makes sense to stick with the funds and invest directly through your company. The advantage of this is that it allows you to defer taxes on any amount that would normally be withdrawn as a salary or dividend from the corporation. Although you will still have to pay corporate tax, you will save on personal tax payable, which can be as high as 50% in some provinces. By keeping excess funds in the corporation, you are using a variety of investment strategies that will earn you interest, dividends, or capital gains. Please note that investment income earned within the company is taxed at approximately 50%; however, it may result in a significant deferral of principal tax.
Transfer Savings to TFSA and RRSPS
A tax-free savings account (i.e. TFSA) is a savings vehicle where all investment income (dividends, interest, capital gains, etc.) accumulates tax-free. The limit for 2020 and 2021 is $6,000 and the total amount you can invest since the government introduced the plan is $69,500. And while there’s no tax deduction for actual TFSA contributions, it’s still a great way to save tax on savings and investments. Opening an account with a bank or investment broker is simple. It’s important to make sure you don’t over contribute, as the penalties for over contributing to a TFSA can be quite steep. Another point to keep in mind for US citizens living and paying taxes in Canada is that income earned from a TFSA is generally taxable in the US. It is a good idea to get advice from an accountant on this matter.
Talk to a tax consultant and seek tax preparation services for leverage these tips better.
Check Taxes Due and Make Sure You Have Allocated the Necessary Funds
Once you’ve finished updating your accounts, it’s always a good idea to check your tax liability to see how much you’ll owe in tax on:
1. Personal taxes payable by owners of companies not registered in the commercial register
Personal taxes can be estimated using this great simple tax calculator where you can enter your net business income.
2. Corporate taxes payable by corporations
The corporate taxes that need to be paid can be roughly estimated at this link depending on the province you are in.
3. Sales tax payable by any registered business
Sales tax must be calculated through your accounting system. Please note that the net amount is calculated by adding the amounts collected from customers and subtracting the sales tax paid from the cost.
Bonus tip: time to incorporate?
Finally, sole proprietors and unincorporated corporations should ask themselves whether it is time to incorporate, which allows tax deferral, even if it is offset by higher administrative costs. Take a look at our guide, which will guide you step-by-step through the process of setting up a joint-stock company and the relevant tax obligations.
While you don’t have to spend your days doing tax planning (which may or may not be less fun than holiday shopping), it’s wise to think about what you might need to do in the coming month to make sure you take advantage of some of the benefits. Tax planning options before they (finally) end this year. Talk to a tax consultant and seek tax preparation services for leverage these tips better.
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