Year End Tax Tips for Business Owners 2014

Tax Management is very critical, especially for small and medium-sized business. This presentation will provide many year-end tax tips for 2014 that you can take advantage of to save your business more money.

1) Withdraw funds from your corporation in a tax-effective manner:Pay Salary/Bonus from the corporation

Advantages

Salary/bonus constitutes as “Earned income” and creates RRSP contribution room.

Salary/bonus is tax-deductible which reduces corporate tax payable.

Income-split with family members who are employees (i.e. related employees – spouse, child) by paying them salary/bonus which will reduce corporate taxable income, and hence, corporate taxes.

Pay into Canada Pension Plan which may be an important retirement strategy for you.

Withdraw funds from your corporation in a tax-effective manner:

Pay Salary/Bonus from the corporationDisadvantages

In comparison to dividends (which is taxed at a lower rate), receiving a salary/bonus can result in greater personal tax as it is fully taxable.

The corporation will be required to pay both portions of CPP (i.e. employer and employee portions).

More administration is required since CPP and income tax have to be remitted to the CRA monthly and T4 slips are required to be filed annually.

Pay Dividends from the corporationAdvantages

Dividends are taxed at a lower rate than salary/bonus, which can result in lower personal tax.

If the taxpayer has no other personal income, a certain amount of dividend income will be tax-free to the payee.

The corporation is not required to make monthly remittance to CRA for CPP. 

Pay Dividends from the corporation

Disadvantages

Dividends are paid out from after-tax profits and thus, does not reduce corporate taxes.

Dividends do not constitute as “Earned Income” and hence, does not create RRSP contribution room. 

Dividends also do not provide opportunity for other personal income tax deductions such as childcare expense deductions.

Mixture of Salary/Bonus and Dividends

 If the taxable income exceeds the $500,000 threshold, salary/bonus can be paid to reduce the taxable income to $500,000.

Dividends can also be paid by the corporation to the shareholder if more cash is required.

Mixture of Salary/Bonus and Dividends

Whether you obtain salary/bonus or dividends from the corporation will depend on the personal financial situation of the owner/shareholder/ family members.

Factors such as cash flow need, personal and corporate income level, source deductions and payroll taxes on salary/bonus need to be considered.

Other methods of obtaining funds from the corporation

Make capital dividend payments to shareholders which is tax-free. 

Have the corporation repay the shareholder loans or charge the corporation interest on the loan.

If large amount of capital was initially invested into the corporation, funds can be extracted from the corporation tax-free to reduce the paid-up-capital.

2) Repay Shareholder Loan or Charge Interest as an Expense: Ensure you repay shareholder loans from the corporation within

one year after the year end of the corporation in which the money was borrowed.

This will avoid inclusion of the loan amount as income on the personal tax return (unless specifically excluded through other provisions).

3) Accrue Salary/Bonus before Year-end:

If salary/bonus is to be paid, the amount can be accrued before the year-end in order to benefit from corporate tax savings.

The salary/bonus payment does not have to be made immediately, and can be paid within 179 days from the year-end, thus deferring personal taxes. 

4) Maximize CCA on Assets

Increase capital cost allowance (CCA) claim on assets by buying depreciable assets and putting them into use before the year-end. 

5) Defer Disposition of Depreciable Assets until after

Year-endConsider selling or getting rid of

depreciable assets until after year-end if recaptured income will result.

6) Increase Business Expenses (Reasonably)

Consider the corporation’s near future requirements (ex. repairs, advertising), and obtain them before the year-end to have higher business expenses and reduce corporate taxes for the current year.

Effective tax-planning is necessary and always beneficial. Implementing these year-end tax tips for 2014 will help you to decrease your taxes and save more of your hard-earned money.