While 2012 is winding down, if you act quickly there’s still time to save tax for yourself and your business for this year and next. Much like Christmas shopping, there’s more to choose from if you don’t wait until the last minute.
Compensation Start by reviewing your compensation from your company to ensure you have the most tax-effective mix of salary and dividends for 2012. Residents of Ontario and Quebec may see a significant increase in the personal tax rate for 2013, but that cost can be reduced by acting before the end of the year.
Ontarians can expect a rate increase on income over $500,000 to 49.5% (from 48%). We expect Quebec’s new PQ government to confirm in its Nov. 20 budget it will increase the 2013 tax rate for income over $100,000 to 50% (from 48%). Of course, this tax increase will depend on the PQ minority government getting its budget passed into law.
One way to reduce that cost is to accelerate bonuses and other income into 2012 and delay deductions until 2013, if that is 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 provinces, so you may want to consider having your company declare and pay dividends before the end of this year.
Family trusts 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 these new top tax rates will apply to the trust’s income and the income-splitting tax. Again, you may want to have the company pay income and dividends in 2012 instead of 2013.
RRSP contributions Consider paying yourself and any family members you employ enough salary to allow the maximum contribution to an RRSP. The limit is 18% of the previous year’s earned income up to $23,820 for 2013. You’ll need about $132,330 in salary in 2012 to make the maximum contribution for 2013.
R&D tax credits If your company claims these credits, consider paying 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 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 because these types of capital expenditures will no longer 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.
Deferring compensation Once you decide on the appropriate salary or bonus for your company to pay you, consider accruing the money in the business at year-end and deferring the payment to you until next year (up to 179 days after the company’s year-end). Assuming a Dec. 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. Of course, if you live in Ontario or Quebec, deferring income may not be a good idea — you’ll want to compare your 2013 versus 2012 marginal tax rates.
Sale of depreciable assets If you’re considering selling depreciable assets that are subject to recaptured depreciation, you may want to hold off 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.
Purchase of depreciable assets As long as you can actually put it to use in your business this year, acquiring the asset just before the company’s year-end (assuming that’s Dec. 31) 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.
Apprenticeship and co-op credits If you employ apprentices and co-op students, you may qualify for federal or provincial tax credits. As an entrepreneur, if you don’t claim these credits, it’s worth the time to check. It’s important to gather the proper documents to support your claim, 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.
There is no one plan for year-end tax savings but just about everyone can benefit by starting early.
Deb MacPherson is a partner with KPMG Enterprise in Calgary.