Year-End Tax Planning Checklist for CorporationsHarry Vouitsis | December 15th, 2011 | News & Events
In these uncertain economic times we live in, the owner-manager will have to maintain his focus on many things throughout the day and, often times, planning to minimize their corporation’s taxes may fall to the wayside. The following tax tips can assist the owner-manager in this regard. Your Fuller Landau advisor can assist you in determining which tax strategies are most suitable for you and can guide you in making informed decisions regarding the planning opportunities discussed below.
Optimal Salary – Dividend Mix Remuneration for 2011
It is important for the owner-manager to determine the optimal mix of salary and dividend. Certain personal factors should be considered in making this determination, such as, marginal tax rate, RRSP contribution room, CPP/QPP contributions and other deductions and credits, such as child care.
As a general rule of thumb, if a corporation is earning active business income below the federal small business deduction (“SBD”) limit ($500,000) it is usually more advantageous for the owner-manager to receive dividends. If the corporation is earning income in excess of the SBD limit, it is usually preferable for the owner-manager to take a bonus. In the event the owner-manager does not need the money for personal consumption, there may be a tax deferral if the income is kept in the corporation.
Consider accruing reasonable salary and bonuses before year-end. The bonus must be paid within 179 days.
Repay any shareholder loans from your corporation no later than the end of the following taxation year after the amount was borrowed.
Consider the benefit of charging interest on any shareholder loans made to the corporation.
Consider paying salaries to family members in lower tax brackets. The salary paid must be reasonable and commensurate with the services rendered. In addition to reducing the family’s overall tax, it allows the family member to have earned income for CPP/QPP, RRSP and child care expense purposes.
Consider setting up a trust to enable the corporation to pay dividends to your spouse or children who are 18 years of age and older.
Purchase Capital Assets Before Year-End
Corporations planning to acquire capital assets in the near future should consider acquiring them prior to the end of their fiscal period. If the asset is acquired and put in use before year-end, the corporation can claim half of the normal capital cost allowance (“CCA”) deduction for the year.
Consider purchasing eligible manufacturing and processing machinery and equipment to take advantage of the accelerated 50% straight-line CCA deduction. This accelerated deduction will continue to apply for purchases made before 2014.
The purchase of eligible manufacturing and processing equipment may also entitle the corporation to a 10% refundable tax credit if the equipment is used in Quebec.
Investment corporations should consider selling securities with accrued capital losses prior to year-end to offset any capital gains realized in the current year or in any one of the three preceding years.
Ensure that the capital dividend account is cleared prior to any loss selling.
Consider making planned donations before year-end.
Consider donating securities of a public company with an accrued gain in lieu of a cash donation. The corporation will receive a donation receipt equal to the fair market value of the donated property. The capital gain will not be subject to tax and the full amount of the non-taxed capital gain is added to the corporation’s capital dividend account, which may be distributed on a tax-free basis to the shareholder.
Corporate Income Taxes
The federal general income tax rate will decline from 16% in 2011 to 15% in 2012.
Consider deferring business income to 2012 and later years by maximizing discretionary deductions in 2011 to take advantage of the rate reduction.
Final Corporate Tax Balances
Pay final corporate income and capital tax balances by the due date, even if it entails borrowing the funds. The interest on the borrowed funds is tax deductible, whereas the interest assessed by the tax authorities is non-deductible.
Protecting Shareholder’s Investment in Business Assets
Consider transferring excess cash and other capital assets, such as real estate, to a separate holding company to secure it from potential claims against the operating company.
Consider securitizing any shareholder loans made to the corporation.
The matters highlighted in this tax memo are presented in broad general terms and, of course, cannot be applied without consideration of all circumstances. The firm will be pleased to discuss with readers the possible effects in specific situations.