As 2022 came to an end, placing your business in a strategic position for the upcoming tax season will help it be as tax-efficient as possible. Here are our top four tax planning tips that you can use. There is never a bad time to start; your future self will thank you!
1. Find the most tax-efficient way to extract funds from your business
- A dividend or compensation may be paid to you as a small- to the medium-sized business owner, with the following qualifications:
- Payment of a salary is deductible to your business, whereas dividends are paid from after-tax profits.
- Paying dividends to a family member may be subject to the “tax on split income” (TOSI) rules and trigger taxation at a higher marginal tax rate.
- Pay yourself a salary large enough to maximize your CPP and RRSP contributions.
- Make arrangements to receive interest on any loans you have made to your business.
- Determine the ideal combination of dividends, interest, and/or income for your unique situation.
2. Be aware of the tax implications of borrowing from your corporation
- Make sure your shareholder loan has a fair interest rate. If the interest rate is less than the prescribed rate of interest set by the Canada Revenue Agency, the benefit may be taxable and included in your income.
- Any loans you make from your business must be paid back within a year of the end of the tax year; otherwise, you must include the loan in your income for the year it was made. If the loan is made in an individual’s capacity as an employee of the business (and not as a shareholder) and is subject to a bona fide repayment agreement within a reasonable term, there may be exceptions available for certain home, company stock, or automobile purchases.
- For example, let’s say you borrow $10,000 from your company on June 1, 2022, and your business has a September 30 year-end. If the loan remains unpaid on September 30, 2023, you must report the $10,000 as income on your personal income tax return for the 2022 taxation year.
- In the event that a loan is forgiven, the forgiven sum will be counted as part of your income in the year of the forgiveness.
- It is crucial to ensure that your non-active business assets do not “taint” your company’s position as a small business corporation or a qualified small business corporation since shareholder loans are assets for your business.
3. Be cognizant of the current Bill C-208 intergenerational transfer rules and potential changes
- If you intend to pass your business soon to your children or grandchildren, consider whether the intergenerational transfer provisions in Bill C-208 offer a window of opportunity for your business’s succession.
- Keep in mind that the government plans to amend the legislation to tighten the rules and that any changes may be applied retroactively.
4. Take advantage of the new tax incentives for depreciable asset purchases
- Think about investing in capital property that qualifies for the new immediate expensing rules. Any capital asset acquired by a Canadian-Controlled Private Corporation on or after April 19, 2021 (or acquired by Canadian residents who own sole proprietorships or certain eligible partnerships on or after January 1, 2022) and made available for use before January 1, 2024, is eligible for immediate expensing. The limit has to be accepted by a connected group. In its Ontario Economic and Fiscal Update 2022, the Ontario government recently announced similar rules.
- Check to see whether you qualify for the accelerated investment incentive, which offers an enhanced first-year capital cost allowance (CCA) deduction for certain qualified properties purchased after November 20, 2018, and made usable before 2028.
- Be aware that the automobile CCA limits have increased from $30,000 to $34,000 for passenger vehicles and from $55,000 to $59,000 for passenger zero-emission vehicles for purchases made on or after January 1, 2022 (both new and used).
Tax-efficient planning for your business can be complex—we’re here to help you! Reach out to us if you require support preparing for your year-end.