These last few weeks of the year are a good time for business owners to take advantage of opportunities to save tax for themselves and their businesses for 2013 and 2014. If you start reviewing your business and personal tax situation now, you’ll have more tax saving options to choose from than you would if you waited until the last minute.
Business owners can choose to receive remuneration from their businesses as salary or dividends or a mix of the two. You should consider the salary/dividend mix that will be the most tax-effective for you each year because changes to tax rates and other rules can affect the results. For example, you have an opportunity to save tax if your company can pay you “non-eligible” dividends in 2013 instead of in 2014. Non-eligible dividends are different from eligible dividends, which are paid to individuals by public corporations and Canadian-controlled private corporations (CCPC) out of business income that has been taxed at the high corporate rate. Any other dividends are non-eligible, including dividends paid to individuals by CCPCs that pay tax at the low small business rate.
The federal tax rate on non-eligible dividends is increasing in 2014, along with rates in some provinces. 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 Ontario, British Columbia and New Brunswick to a low of slightly more than 1% in Quebec. In Alberta or Saskatchewan, you can save about 2%. Tax savings in other provinces range from about 1.5% to about 3%.
For example, if you’re thinking of having your company pay you a $100,000 non-eligible dividend either this year or next, your tax savings from receiving the dividend in 2013 instead of 2014 would be about $4,000 in B.C., about $2,000 in Alberta and about $1,000 in Quebec.
When you’re considering the salary portion of your income, keep in mind that you may want to pay yourself enough salary to allow the maximum possible contribution to an RRSP. The same goes for any family members your company employs. 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 for 2013 to make the maximum RRSP contribution for 2014.
The amount of your salary and bonus can also affect the company’s tax situation. 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 if your company claims R&D tax credits. Doing so can help to maximize the benefits of your company’s R&D tax credits and refunds by making it eligible for the special R&D tax credit rate that smaller private companies can get.
If your company’s not eligible for the special R&D tax credit rate, 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 before the end of 2013 instead of 2014, if possible.
Also, if your company is planning to acquire dedicated R&D equipment, you may want to make your purchase before the end of 2013 if you can because these types of capital expenditures won’t be eligible for R&D credits starting in 2014.
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 Dec. 31 year-end, your company gets a deduction in 2013 and source deductions like income tax do not have to be remitted until 2014. You don’t have to include the salary or bonus amount in your income until you file your personal tax return for 2014 sometime in 2015.
Another opportunity for business owners to save tax in 2014 is to split income with family members in a lower tax bracket by making loans to them. This way, income from investing the loan proceeds can be taxed at a lower rate.
For example, if your spouse is in a lower tax bracket than you are, you can lend him or her money to invest so that the investment income can be taxed in his or her hands instead of yours. To achieve this, it’s essential that you have a written agreement that specifies the terms of repayment and an interest rate at least equal to the CRA’s prescribed rate at the time. Your spouse must pay you interest on the loan annually by Jan. 30 of the following year. If the interest is not paid, the investment income from the loan will be taxed in your hands. You can also split income with minor children using a family trust.
The CRA’s prescribed interest rate for these loans increased to 2% from 1% for the last quarter of 2013, which started on Oct. 1, but the rate is going back down to 1% starting on Jan. 1. If you’re thinking about making family income splitting loans, you may want to wait until the New Year to lock in the lowest possible interest rate of 1%.
These are just a few ideas for year-end and New Year’s tax savings. Talk to your tax advisor about other potential opportunities for you and your business in the coming months.
Deb MacPherson is a partner with KPMG Enterprise in Calgary.