Many corporations have a Dec. 31 year-end even though any date could have been chosen within 53 weeks of your incorporation date.
While the tax tips I want to talk about today relate to a Dec. 31 financial statement deadline, they can also apply to other year-end dates. The exceptions are those involving payroll which operates on a calendar rather than a fiscal year.
There are generally five ways of receiving income from a corporation that you own other than removing your initial investment.
If the company makes an annual income of more than the $500,000 small business deduction limit, you can bonus out to the owner/employee the excess to take advantage of the small business tax savings.
If your income is not that high and you need all of your income for personal expenses, you can bonus out your entire income.
You can participate in a Personal Services Health Plan and have your health expenses returned to you at 100 per cent (subject to some limitations).
You can decide to let the corporation pay the taxes on the entire income and pay out dividends to the shareholders.
Or, you can combine any of the above options.
You need to consider your long-range plan when deciding whether to bonus or dividend earnings and how much to bonus.
It can be a catch 22 because you may want to save paying taxes, however, you may want to show increased revenues and net income if you are trying to sell your business or apply for financing.
Reducing taxes in the first five years of your business will definitely provide you with cash flow that you will be able to reinvest in your business for future growth.
You can also pay year-end bonuses to your employees to reduce your taxable income.
They will need to report the bonuses on their current tax return and you will need to make sure that the required source deductions are remitted to Canada Revenue Agency before the deadline.
These bonuses could also be payments directly into their RRSP savings plans.
There can be a bit of a tax deferral if you do not need the funds from your corporation. You can let the corporation pay the tax, and then take the funds out as needed, paying the personal taxes at that time.
You will need to account for both sides of the Canada Pension Plan deductions if you are an active owner/employee under the age of 66. You can apply for an exemption if you are over 65 and under 71 and still working.
You can deduct a reasonable salary that is paid to family members for working in your business.
You might have a family member performing website maintenance, janitorial duties or administrative duties.
Also, if you have been paying EI for your family members, you can apply to the CRA for a refund.
If you need equipment in your business, you can purchase that equipment before the year end and receive 50 per cent of the annual capital cost allowance on your corporate tax return that will help to reduce taxes payable.
If you are in a loss position, it may be better to elect not to take any CCA on your assets making that deduction available for future tax years instead of increasing the tax losses carried forward.
If you are in a research and development business, you may qualify for the Scientific Research Experimental Development Credit.
The rules are changing as effective Jan. 1, 2014, capital assets will no longer qualify for the credit, so it would be a good idea to purchase any assets that you might require before the year-end.
You can pay out eligible dividends rather than ordinary dividends out of the corporation to use up any available GRIP balance. The payment of eligible dividends will require notification by way of a letter to the shareholders, or an inclusion in the board of directors’ minutes.
You may have excess funds in your Capital Dividend account that may be available for a tax free dividend to the shareholders. Alternatively, if you have investments in the company you can flow through those shares to the shareholders as a dividend and receive the Refundable Dividend Tax On Hand.
If you provide services to a small number of clients through a corporation and have less than five employees, the CRA may classify you as a Personal Service Business, which does not qualify for the Small Business Tax Deduction.
