December 6, 2012
Owner-Managers — Consider Last-Chance 2012 Tax Savings Opportunities
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”.
Personal Tax Ideas
Mitigating tax rate
changes in Ontario and Quebec
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
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.
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
· Your cash flow needs
· Your income level
· The corporation’s income level
· Payroll taxes on salary
· The corporation’s status for tax purposes.
Consider your risk
for future business losses
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
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.
down your taxable benefit on company cars
· 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.
Corporate Tax Ideas
expenses and postponing income
Timing your asset
sales and purchases
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.
salary or bonus
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.
spouse and children
· 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
Applying for Ontario
RST refunds and being mindful of other indirect tax
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).
effects of the new foreign affiliate rules
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.
We Can Help
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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