December 6, 2012
Even though 2012 is almost over, many tax planning opportunities are still available before the year ends. As an owner-manager, you can still act quickly to reduce taxes for yourself and your incorporated business this year. Keep the following tax planning tips in mind as you review your business and personal tax situation for 2012.
These tips assume your corporation has a December 31 year-end. Even if it doesn’t, you can still use these ideas to maximize personal tax savings in 2012 and whenever your business’ year-end comes up. For more general tips on year-end tax savings for individuals, see our TaxNewsFlash-Canada, “Time-Sensitive Tips for Reducing Your 2012 Personal Tax Bill”.
|Tax planning ideas |
You may want to consider Personal Tax Ideas including:
- Mitigating tax rate changes in Ontario and Quebec
- Timing your dividends
- Planning your most tax-effective dividend/salary mix
- Repaying shareholder loans
- Driving down your taxable benefit on company cars.
Your business should consider Corporate Tax Ideas including:
- Accelerating expenses and postponing income
- Timing asset sales and purchases
- Accruing salary or bonus
- Employing your spouse and children
- Applying for apprentice and co-op tax credits
- Applying for Ontario RST refunds and being mindful of other indirect tax deadlines
- Managing the effects of the new foreign affiliate rules
Mitigating tax rate changes in Ontario and Quebec
If you live in Ontario or Quebec, you may see a significant increase in your personal tax rate for 2013. For 2013, Ontario will increase its tax rate on income over $500,000 to 49.5% (from 48%). Quebec will increase its 2013 top tax rate to 25.75% (from 24%) for income over $100,000. This would result in a combined federal and Quebec top marginal tax rate of 50%, up from 48%, if Quebec’s minority government can get its budget passed into law.
To save 1.5% percent in tax in Ontario or 2% in Quebec if you fall into your province’s new combined top tax bracket, you may want to consider accelerating bonuses and other income into 2012 and delaying deductions until 2013, if it’s practical for you. The tax rates on both “eligible” and “non-eligible” dividends will also increase by about 2% in these new top tax brackets in both Ontario and Quebec, so you may want to consider having your company declare and pay dividends before the end of 2012 instead of early in 2013.
If you have a family trust or your children receive dividends or capital gains subject to the tax on split income (the “kiddie tax”), keep in mind that these new top tax rates will apply to the trust’s income and the income splitting tax. Thus, you may want to consider having your company pay income and dividends to the family trust or your children in 2012 instead of 2013.
Timing your dividends
The combined federal and provincial tax rates on eligible dividends are staying the same in 2013 in all provinces, except Ontario and Quebec. Owner-managers of Canadian controlled private corporations (CCPCs) that have a general rate income pool (GRIP) and a refundable dividend tax on hand (RDTOH) balance may realize benefits by paying eligible dividends in 2012 instead of 2013, if they are subject to tax at the top marginal tax rate.
For instance, in Ontario the cash flow benefit is about 1.64% (33.33% - 31.69%). Waiting until 2013 to pay a GRIP/RDTOH dividend will result in a cash flow cost of about 0.52% (33.85% - 33.33%). Similarly, in Quebec the benefit is about 0.5% (33.33% - 32.81%) in 2012. Waiting until 2013 will result in a cost of about 1.9% (35.22% - 33.33%). As mentioned above, in all other provinces owner-managers will generally be indifferent between paying eligible dividends in 2012 instead of 2013 because tax rates are not changing.
If you live in Ontario or Quebec and receive large dividends in your province of residence, you should consider incorporating your investment portfolio to realize a small tax deferral advantage by receiving dividends in a holding company versus personally. By forming a holding corporation, you may also be able to control your level of income to possibly keep it below the threshold for the new top income tax brackets in 2012 and 2013.
You may realize tax savings by receiving capital gains treatment rather than dividend treatment in some provinces. If you live in Manitoba, Ontario, Quebec or Nova Scotia, you could see tax savings of almost 8% or more by choosing to receive capital gains treatment. For example, if you live in Manitoba, the capital gains rate in Manitoba is 23.20%, or 9.07% lower than the eligible dividend rate of 32.27%. In other provinces, savings could range up to 5%, except in Alberta, where capital gains treatment results in a small disadvantage.
If you're an owner-manager in Ontario or Quebec or have an investment holding company, you may want to arrange for the corporation to pay you non-eligible dividends in 2012 rather than 2013 where practical. By doing so, you may save about 2% in tax in Ontario and 2.2% in Quebec if you are subject to tax at the new top marginal tax rates.
As the combined top marginal personal income tax rates on non-eligible dividends remain the same throughout 2012 and 2013 in all other provinces, there should be no tax savings or tax cost of paying dividends in 2012 versus later in these other provinces.
Planning your most tax-effective dividend/salary mix
As the owner of an incorporated business, you can choose to receive income as salary or dividends. To maximize your tax savings for 2012, you should carefully analyze the best mix of salary and dividends for you, which will depend on many factors including:
- Your cash flow needs
- Your income level
- The corporation’s income level
- Payroll taxes on salary
- The corporation’s status for tax purposes.
R&D tax credits
If your company claims R&D tax credits, you may want to pay yourself enough salary or bonus to keep the company’s taxable income at or below the federal small business deduction limit of $500,000. Doing so can help to maximize the benefits of your company’s R&D tax credits and refunds. If you’re planning to acquire dedicated R&D equipment, you may want to make your purchase in 2013 if you can because these types of capital expenditures won’t be eligible for R&D credits starting in 2014. If your company’s not eligible for the special R&D tax credit rate that smaller private companies can get, keep in mind that the general R&D tax credit rate will go down to 15% (from 20%) starting in 2014, so you may want to incur upcoming expenditures in 2013 instead of 2014, if possible. Lastly, if you make payments to arm’s-length contractors, only 80% (from 100%) will be used to calculate R&D credits effective January 1, 2013. Thus, you should ensure payments are made in 2012 where possible.
You may also want to pay yourself enough salary to allow the maximum possible contribution to an RRSP. The same goes for any family members you’ve employed (see below). The maximum contribution is 18% of the previous year's earned income, up to a limit of $22,970 for 2012 and $23,820 for 2013. As such, you will need about $132,330 in salary in 2012 to make the maximum contribution for 2013.
Consider your risk for future business losses
If you are in a volatile business that you feel could suffer a downturn, paying out a large salary in a profitable year can prevent you from carrying back a later year’s business loss in the company, if it materializes.
Suppose, for example, your business earns $1 million in 2012, and you pay out $500,000 to yourself as a salary, leaving $500,000 as the business’s income. If the business loses $1 million in 2013, you will not be able to carry back the entire loss to offset all the tax your business paid in 2012. Instead the loss will need to be carried forward to reduce future taxable income.
If you had left the funds as business income and paid out dividends instead, you would be able to carry back the entire 2013 loss to 2012, retroactively wiping out the business’s 2012 corporate tax, and obtain a refund of federal and provincial corporate tax.
Repaying shareholder loans
If you borrow money from your corporation at low or no interest, you are considered to have received a taxable benefit from the corporation equal to the CRA’s current 1% prescribed interest rate, minus any interest you actually pay during the year or within 30 days after the end of the year.
Unless the loan is for a limited number of qualified purposes, it will be included in your income for tax purposes unless you repay it within one year after the end of the company’s taxation year in which the loan was made. For example, if your company has a December 31 year-end and it made you a loan on October 1, 2011, you must repay the loan by December 31, 2012 to avoid paying tax on the amount of the loan as income in your 2011 taxation year.
Driving down your taxable benefit on company cars
If you drive an automobile provided by your company, your taxable benefit for your use of the car may be reduced for 2012. The taxable benefit consists of two elements: the standby charge and the operating cost benefit. The standby charge may be reduced if you can show that:
- Your business use of the car is more than 50% of the kilometres driven, and
- Your personal use of the car is less than 1,667 kilometres per month, or about 20,000 kilometres per year.
If you meet both conditions, you can reduce your reported standby charge by a percentage equal to your personal-use kilometres driven divided by 20,000 (assuming the car was available to you for the full 12 months). The benefit may be reduced by any reimbursement you made in 2012 for use of the car other than the portion relating to the operating cost.
The taxable benefit for operating costs is 26¢ per kilometre of personal use for 2012. If the company pays any operating costs during the year for your personal use of the company car and you don’t fully reimburse the company by the following February 14, the 26¢ rate applies (less any partial reimbursement that you pay by this date).
An alternative calculation is available for the operating cost benefit where your business use of the car exceeds 50%. If you make a written notification to your company by December 31, 2012 that you wish to use this option, the operating cost benefit will be a flat 50% of the standby charge.
Accelerating expenses and postponing income
If you have a company subject to the low small business tax rate in Nova Scotia, you may have an opportunity to realize modest tax savings by accelerating expenses in 2012 and postponing income into 2013, as the corporate tax rate will decrease to 3.5% (from 4%), effective January 1, 2013. In all other provinces, the general and small business income tax rates remain unchanged from 2012 to 2013.
Timing your asset sales and purchases
If your company has a depreciable asset you’re thinking about selling that will be subject to recaptured depreciation, consider holding off on the sale until after your 2012 corporate year-end, as long as it makes sense for your business. That way, you'll be able to claim capital cost allowance (CCA) on the asset for one more year. You'll also defer the recapture arising from the sale until 2013.
On the other hand, if you're considering buying any depreciable assets, try to arrange to acquire them by December 31, 2012 (assuming your company has a December 31 year-end). As long as you can actually put the asset to use in your business this year, acquiring the asset just before the company’s year-end will accelerate the timing of your tax write-off — you'll be able to claim CCA on the asset for 2012 at half of the CCA rate otherwise allowable (due to the "half-year" rule). You'll also be able to claim CCA at the full rate for all of 2013.
Accruing your salary or bonus
Once you decide on the appropriate salary or bonus for your company to pay you, consider accruing the salary or bonus in the business at year-end but deferring the payment to you until next year (up to 179 days after the company’s year-end). Assuming a December 31 year-end, the company gets a deduction in 2012, source deductions do not have to be remitted until 2013, and you don't have to include the amount in your income until you file your personal tax return for 2013 sometime in 2014.
Of course, if you live in Ontario or Quebec, deferring income may not be a good idea for you — you’ll want to compare your 2013 versus 2012 marginal tax rates to make this decision.
Employing your spouse and children
Consider having your company pay a salary to your spouse and/or children. The salary must be reasonable in light of the services they perform for the business. Such services might include:
- Filing and other administrative work
- Business development planning
- Acting as a director for the corporation.
The CRA is usually fairly flexible in interpreting what constitutes a reasonable salary, provided services are genuinely being provided. Note that the cost of payroll taxes, Canada Pension Plan contributions and Employment Insurance premiums should be weighed against potential tax savings expected.
Applying for apprentice and co-op tax credits
If your company claims federal or provincial tax credits for apprentices and co-op students you employ, you already know these tax credits can provide a valuable boost to entrepreneurs. If you don’t claim these credits, it’s worth the time to check on whether you qualify. It’s important to gather the proper documents to support your claim for these credits, such as apprenticeship training agreements, as soon as possible because it can be difficult to get these documents after apprentices have moved on. If your apprentices or co-op students are leaving your company at the end of the year, now is a good time to make sure you have all the paperwork you need from them.
Applying for Ontario RST refunds and being mindful of other indirect tax deadlines
If you overpaid Ontario Retail Sales Tax (RST), possibly by incorrectly applying the transitional rules when Ontario RST was replaced with the HST on July 1, 2010 or by paying Ontario RST on exempt goods and services, you have until December 31, 2012 to claim overpaid amounts.
Complying with this requirement and your business’ other indirect tax filing obligations may become more complicated and time-consuming in the coming months because you will have to meet your current filing deadlines along with some new requirements arising from federal and provincial tax changes. TaxNewsFlash-Canada 2012-24, “Deadline Crunch Time — Are You Ready?”, highlights some upcoming indirect tax deadlines that affect a wide range of businesses and non-profit organizations (NPOs).
Managing the effects of the new foreign affiliate rules
If your company has an ownership interest in a foreign corporation, you may need to act now or make elections to offset potential adverse effects of the new foreign affiliate rules. The government recently released legislation that provides the last, and likely final, version of the proposed tax rules affecting foreign affiliate members of Canadian corporate groups. The legislation will bring into law a number of measures that could have a significant effect on foreign affiliate reorganizations and the computation of surplus in foreign affiliate groups.
There may be important steps that you can take to manage the effect of changes such as the new upstream loan rules, the foreign tax credit generator rules and the change to foreign affiliate distribution rules, among other things.
Tax planning should be an important part of your efforts to get the most out of your businesses' financial resources. Though you only have to file your tax returns once a year, it’s the tax planning steps you take throughout the year that will help you and your business save money at tax time. Your KPMG Enterprise adviser can help you review your personal and business tax situation and determine what steps you can take before the year-end to minimize the taxes you’ll pay for 2012. For details, contact your KPMG Enterprise adviser.
Information is current to December 6, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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