Even though 2013 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. K eep the following tax planning tips in mind as you review your business and personal tax situation for 2013.
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 2013 and whenever your business' year-end comes up. For more general tips on year-end tax savings for individuals, see our TaxNewsFlash-Canada, “Reduce Your 2013 Personal Tax Bill — Time-Sensitive Tips”.
|Tax planning review — Top 10 year-end opportunities
Personal Tax Ideas
- Manage personal tax rate changes
- Time your dividend payments
- Plan your dividend/salary mix
- Delay repaying shareholder loans
- Drive down your taxable benefit on company cars
Corporate Tax Ideas
- Time your purchase and sale of fixed assets
- Accrue salary or bonus
- Employ your spouse and children
- Apply for apprentice and co-op tax credits
- Be mindful of certain indirect tax changes and deadlines
1. Manage personal tax rate changes
If you live in British Columbia or New Brunswick , you may see a significant increase in your personal tax rate for 2014. For 2014, the B.C. government created a new income tax rate for individuals who earn more than $150,000 a year. These individuals will see their rates increase to 45.8% (from 43.7%) for 2014. In the case of New Brunswick, individuals who earn more than $135,055 a year will see their rates increase to 46.8% (from 45.1%) for 2014.
To save 2.1% in tax in British Columbia or 1.7% in New Brunswick if you fall into your province's new combined top tax bracket, you may want to consider accelerating bonuses and other income into 2013 and delaying deductions until 2014, if it's practical for you. The tax rates on “eligible” dividends will also increase by 2.9% in British Columbia and 2 .4% in New Brunswick , so you may want to consider having your company declare and pay dividends before the end of 2013 instead of early in 2014.
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 2013 instead of 2014.
2. Time your dividend payments
If you're an owner-manager or have an investment holding company, you may want to arrange for the corporation to pay you non-eligible dividends on your shares in 2013 rather than 2014 where practical. The combined top marginal federal/provincial tax rate on non-eligible dividends will increase in all provinces due to an increase in the federal rate. If you're in the top tax bracket in your province, your tax savings from receiving non-eligible dividends in 2013 instead of 2014 range from a high of about 4% in British Columbia and Ontario to a low of around 1% in Quebec and P.E.I. In Alberta or Saskatchewan, you can save around 2%. Tax savings in other provinces range from about 1.5% to about 3% (see TaxNewsFlash-Canada, “Reduce Your 2013 Personal Tax Bill — Time-Sensitive Tips” for a full breakdown of the 2013 and 2014 rates).
If a Canadian-controlled private corporation ( CCPC) has both a general rate income pool (GRIP) and r efundable dividend tax on hand ( RDTOH ) in 2013, there is an advantage in all provinces (except for Quebec, Nova Scotia and Ontario for individuals over the $509,000 tax bracket) to paying out eligible dividends to recover RDTOH as the personal tax rate on eligible dividends is lower than the 33.33% refund that the corporation will receive.
In 2014, there continues to be an advantage to paying out eligible dividends to recover RDTOH in the same provinces as in 2013. However, after increases in the British Columbia and New Brunswick top marginal tax rates in 2014, the advantage to paying out eligible dividends in these provinces will be reduced. As such, if a corporation has both GRIP and RDTOH available, there is an advantage to paying out eligible dividends to residents of British Columbia and New Brunswick in 2013 instead of waiting until 2014.
If you live in British Columbia or New Brunswick and receive large dividends in your province of residence, you may want to consider incorporating your investment portfolio to realize a small tax deferral advantage by receiving dividends in a holding company instead of personally.
You may also realize tax savings by arranging to receive capital gains treatment rather than dividend treatment in some provinces, if possible. If you live in Manitoba, Ontario, Quebec or Nova Scotia, you could see tax savings of almost 9% 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.
3. Plan your 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 2013, 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 level of the corporation's taxable income.
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.
For more tips on year-end tax savings for companies that claim R&D tax credits, see TaxNewsFlash-Canada, “Make Last-Minute R&D Purchases Before 2014” [PDF 52Kb].
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 $23,820 for 2013 and $ 24,270 for 2014. As such, you will need about $134,830 in salary in 2013 to make the maximum RRSP contribution for 2014.
Consider your risk for future business losses
If you are in a volatile business that you feel could suffer an economic 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 2013, and you pay out $500,000 to yourself as a salary, leaving $500,000 as the business's income in your corporation. If the business loses $1 million in 2014, you will not be able to carry back the entire loss to offset all the tax your business paid in 2013. Instead, at least $500,000 of the loss will need to be carried forward to reduce future taxable income in the corporation.
If you had left the funds as business income and paid out dividends instead, you would still be able to carry back the entire $1 million 2014 loss back to 2013, retroactively wiping out the business's 2013 corporate tax, and obtain a refund of federal and provincial corporate tax paid.
4. Delay repaying shareholder loans
If you borrow money from your corporation at low or no interest, you are generally considered to have received a taxable benefit from the corporation equal to the CRA's current 2% 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, 2012, you must repay the loan by December 31, 2013 to avoid paying tax on the amount of the loan as income in your 2012 taxation year.
Note, however, that the CRA's prescribed rate of interest is expected to return to 1% for the first quarter of 2014.
5. Drive 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 2013. 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 2013 for use of the car other than the portion relating to the operating cost.
The taxable benefit for operating costs is 27¢ per kilometre of personal use for 2013. 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 27¢ 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, 2013 that you wish to use this option, the operating cost benefit will be a flat 50% of the standby charge.
6. Time your purchase and sale of fixed assets
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 2013 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 2014.
On the other hand, if you're considering buying any depreciable assets, try to arrange to acquire them by December 31, 2013 (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 2013 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 2014.
7. Accrue 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 2013, source deductions do not have to be remitted until 2014, and you don't have to include the amount in your income until you file your personal tax return for 2014 sometime in 2015.
Of course, if you live in British Columbia or New Brunswick, deferring income may not be a good idea for you — you'll want to compare your 2014 versus 2013 marginal tax rates to make this decision.
8. Employ 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 extra cost of payroll taxes, Canada Pension Plan contributions should be weighed against potential tax savings expected.
9. Apply 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 your business. 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 left your employ and 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.
10. Be mindful of certain indirect tax changes and deadlines
Many businesses across Canada are required to pay GST/HST and QST on the taxable benefits provided to their employees in their reporting period that includes February 28, 2014. The related rules and rates can vary depending on a number of factors, such as the location of the last establishment of the employer where the employee ordinarily work or report to. For 2013, you should carefully review the rates to remit these taxes, since the following provinces made sales tax changes during the year:
- B.C. eliminated its HST and returned to a GST and new PST on April 1, 2013
- Quebec changed the QST rate to 9.975% (from 9.50%) on January 1, 2013
- Prince Edward Island introduced a new HST on April 1, 2013.
Large businesses may also have to adjust their systems to account for the elimination of the 5% simplified method for QST purposes for expenses incurred by employees or allowances paid to these individuals on or after January 1, 2014. [See Canadian Tax Adviser, “Prepare for Cash Flow Impact of QST Change for Employee Expense Accounts”, dated October 29, 2013.
If your business provides financial services, particularly if you are located in Quebec, you may have new QST compliance and filing requirements for 2013. These new requirements are part of the QST changes on January 1, 2013 in which the QST rules were further harmonized with the GST rules and most financial services became QST-exempt supplies. Previously, many of these supplies were zero-rated supplies. For details, see TaxNewsFlash–Canada 2012-40 “New QST Ins and Outs – Get Ready for January 1, 2013” [PDF 100Kb].
Also, if you offer registered pension plans to your employees and are subject to the GST/HST pension plan rules, you may consider making an election before January 1, 2014 to apply the relieving measure related to these rules announced in the 2013 federal budget. Similar measures have been announced for QST purposes. For details, see TaxNewsFlash–Canada 2013-17 “Employers – New GST/HST Relief Available Under Pension Plan Rules”.
The year-end is often a good time for you to review recent tax changes and new tax obligations, such as the self-assessment requirements under B.C.'s new PST for goods imported into a province, and Manitoba's PST rate increase to 8% (from 7%) on July 1, 2013.
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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 2013. For details, contact your KPMG Enterprise adviser.
Information is current to December 4, 2013. 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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