Small Business Tax Guide & Preparation in Canada

Determining Salary & Dividend Mix:

Find the best combination of salary and dividends for the owner-manager and other family members for 2020. Major factors to look for before making a decision are marginal tax rate, the corporation’s tax rate, payroll taxes, RRSP and CPP contributions and deductions and credits like donations and childcare expenses etc. Consider retaining income in the corporation if possible.

Family Members’ salary:

Pay family members who provide services to the business, a reasonable salary before year-end. This income will provide additional room for the 2021 RRSP contribution and provides a tax deduction to the business in 2020.

Family Members’ Dividends:

Adult family members shareholders who are in a lower tax bracket should be considered for paying dividends. Individuals with no other income can receive up to approximately $53,000 in eligible dividends in 2020 before federal tax is payable. Also, consider applying the tax on split income (TOSI) before paying dividends to any family members.

Stock Option Plans:

Companies that have stock options in their compensation plans should consider whether the proposed new stock option rules may apply to begin July 1, 2021. The rules propose to limit the amount of employee stock options eligible for the stock option deduction to $200,000 for options granted after June 2021. The limit will not apply to stock options granted by CCPCs or by non-CCPCs with annual gross revenue not exceeding $500 million.

Capital Gains:

Hold the investments with unrealized capital gains until 2021.

Remuneration Planning:

Payroll and bonuses should be accrued before the year-end and should be paid within 179 days after the company’s year-end. This will permit a deferral of tax on salaries. Sufficient remuneration should be paid before year-end to maximize the owner-manager’s 2020 pension contribution room likes of RRSP, EPSP, RCA, IPP, etc.

Corporate Withdrawals:

Make tax-effective corporate withdrawals by paying dividends or non-taxable capital dividends, returning capital or repaying shareholder loans from the corporation before year-end as.

Passive Investment Income:

Consider planning to reduce passive investment income before year-end by monitoring the corporation’s passive investment income, if needed. For 2018 and later taxation years, CCPCs with “adjusted aggregate investment income” (AAII) above $50,000 (on an associated group basis) will be subject to a reduction in the amount of small business deduction that can be claimed. AAII normally includes rent, royalties, interest, portfolio dividends, dividends from foreign corporations that are not FAs, and taxable capital gains from the disposition of passive investments.

Depreciable Assets:

Purchase new business equipment, office furniture, etc. before year-end. The accelerated investment incentive (AII) allows for an increased first-year CCA deduction for most depreciable assets acquired after November 20, 2018, and available for use before 2028. Hold any depreciable assets that will be subject to recaptured depreciation, until after year-end.

Inter-company Charges:

Review inter-company charges to ensure charges are reasonable and consider any adjustments to reduce the overall taxes of a related group.

Donations:

Make charitable donations and political contributions before year-end.

Shareholder Loans:

Make sure that shareholder loans are repaid by the end of the corporation’s taxation year following the taxation year in which the loan was received.

Individual Pension Plan:

Set up an Individual Pension Plan (IPP) to save for retirement for an owner-manager who earns significant employment income and is at least 40 years of age. An IPP can provide both year-end corporate income tax deductions and a structured retirement savings plan for an owner-manager, and for certain family members who are employees. The new passive investment income rules do not apply to investment income earned in an IPP.

Corporate Tax Balances:

Pay final corporate income tax balances within two months (it is three months for certain CCPCs) after year-end to avoid interest charges. Check if any COVID-19 payment extensions are available.

SR & ED:

Any claims for SR & ED expenditures or ITCs should be filed by 18 months after the corporation’s year-end. Consider whether any COVID-19 payment extensions are available to the company.

Lifetime Capital Gains Exemption:

Small business corporations’ shares are eligible for the lifetime capital gains exemption. Crystallize the lifetime capital gains exemption and/or restructuring to multiply access to the exemption with other family members.

Succession Planning:

Estate freeze to be used to reduce taxes on death and to transfer the future growth of a business to family members.

Lifetime Capital Gains Exemption:

Small business corporations’ shares are eligible for the lifetime capital gains exemption. Crystallize the lifetime capital gains exemption and/or restructuring to multiply access to the exemption with other family members.