Tax Strategies

Corporate tax planning is an attempt to reduce tax liabilities using different tax reduction strategies. To get the most out of your tax strategies, you need to start the tax planning process well before the end of the fiscal year. Writing-off assets, bonus declaration, and the investment in RRSP accounts are some of the important tax strategies that will help business owners to reduce their tax obligations significantly. Here are some of the important tax strategies that a small business owner must keep in mind while planning for corporate taxes.

Bonus declaration at the end of the fiscal year and not paying it off in the same year is one of the useful strategies for tax reduction. If you have decided to declare a bonus, it will be recorded as bonus expense in the income statement and recorded as bonus payable in the balance sheet. Without actually paying a bonus, your corporation can claim a tax deduction for the bonus amount when filing the corporate income tax return.

Northern River Financial suggests revisiting your family’s business remuneration structure on an annual basis. You need to determine an optimal remuneration strategy for your family to minimize the corporate tax liability on your business. Whenever you pay salaries and dividends to your family members out of your business’s income, you need to make sure that income tax and source deductions are remitted to the CRA as required. The salary amount of your family members must be reasonable, and it should be commensurate with services performed by them.

The Small Business Deduction (SBD) reduces your corporate tax rate, and it is one of the most common tax advantages that are available to Canadian-controlled Private Corporations (CCPCs). The reduced tax rate is available on active business income up to the corporation’s business limit for the year. The federal business limit is $500,000 to be eligible for SBD. But there are certain restrictions that have applied to limit access to the SBD.

If you have the intention to acquire capital assets for your business; it is preferential to purchase them before the end of your fiscal year. You can get a claim equal to one-half of the usual amount of Capital Cost Allowance (CCA). It will reduce your business income in the current fiscal year and your business’s tax liability will automatically reduce. If your business is showing an operational loss during the current fiscal year and you have procured a capital asset, you can get full year’s CCA claim in the next year.

If you are disposing of a capital asset, it is recommended you delay the disposal till the start of the next fiscal year. This will have double benefits; it will allow your business to claim one additional year of CCA and will also postpone the inclusion of any capital gains in the taxable income by an additional year. If you have investments in real estate or in the stock market and you are expecting capital gains, you must defer all your planned dispositions till the beginning of the next fiscal year.

Lastly, Northern River Financial suggests that business owners invest in tax efficient investments. On equity investments, 50% of the gains realized on the sale of shares would be taxable whereas investment income earned on fixed income bonds is fully taxable. Therefore, you need to strategize your investments in different investment portfolios keeping in mind the tax implications of such investment for your business.

Key considerations

  • Bonus declaration
  • Optimal remuneration strategy
  • Small business deduction
  • Tax depreciation
  • Tax-efficient investments