As the year end is around the corner, it’s that time of year… Christmas carols, shopping bonanza, and our team’s favourite topic – Year End Tax Planning!
We would like to share our Link: 2019 Year-End Tax Planning article for you and your accountant to review.
Our team has also put together a summary of the article for you:
1. Review your compensation mix:
Consider what mix of salary and dividends makes the most sense for you for 2019. Generally, our tax law is designed to leave you indifferent between paying salary or dividends (you should have about the same money in your pocket after taxes either way).
The system is not perfect however, and this is helpful to gather your accountant’s input. Something to keep in mind - If your only source of income is ineligible dividends (those paid out of corporate earnings taxed at the small business rate), you can receive up to $50,000 in 2019 and pay an average tax bill of just 9.7 per cent across the country. Also, dividends don’t require tax withholdings or Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.
The downside to receiving dividends only - salaries will provide you with RRSP contribution room (salaries of $151,278 in 2019 will provide the maximum in RRSP room of $27,230 for 2020), and if your company’s taxable income is more than $500,000 in 2019, salaries can reduce your corporate tax bill.
2. Any salaries to family members?
Has a family member provided services to your business in 2019?
If they have, consider paying them a reasonable salaries, wages, or bonuses before year-end if they’ll pay less tax than you or your company.
An individual can earn up to $12,069 and pay no federal tax, so your business may be entitled to a deduction with little or no tax paid by your family member personally if they have a low income. This idea also provides RRSP contribution room to your family member, can allow for child-care deductions, and contributions to the CPP if the hope is to collect CPP later.
3. Is your personal income year a LOW-Income year?
If you expect to be in a low marginal tax bracket for 2019 and expect to be in a higher marginal tax bracket in future years, you may want to consider to make an early withdrawal from your RRSP before year-end. You can consider to top up your TFSA with the funds, and if you don’t have TFSA room, you can put it towards a non-registered account. The drawback of this strategy is that we lose the tax deferral ability on the growth of the funds if it is in a non-registered portfolio.
4. Is your personal income year a HIGH-Income Year?
If you expect to be in a high marginal tax bracket for 2019 and expect to be in a lower marginal tax bracket in the future years (for example after retirement), you may want to consider to make a bigger RRSP contribution (if you have the contribution room).
A contribution to RRSP will lessen your reportable income and therefore reducing your average tax.
5. Should you consider a tax-loss selling for your non-registered assets?
If you have a realized capital gains during the year, to trigger losses can help to offset gains.
The losses can be carried back 3 years (2016-2018) or carried forward indefinitely to offset future year’s capital gains.
If you’re planning to trigger a capital loss in a corporation, it is advised that you should speak with your accountant, as it may be advantageous to pay out a capital dividend from your CDA account if it’s positive, before triggering the loss.
6. Are there tax free withdrawals you can make from your corporation?
Paying yourself capital dividends if your company has a balance in its “capital dividend account” (which is the case most commonly when the company has realized capital gains in the past or has collected life insurance benefits), returning “paid-up capital” that you have invested in the company, or paying yourself rent if the company occupies space in your home (this income can be offset by deductions against that income such as mortgage interest, property taxes, utilities or repairs).
7. Have you lent your money to your corporation?
Consider taking a repayment of those loans if you need cash personally since these will be tax-free payments to you.
Also, by taking repayment could reduce the passive income you’re earning inside your corporation and reduce the company’s tax bill.
8. Have you borrowed money from your corporation?
Be aware of the loans that will be taxable to you unless you repay the amounts by the end of the year following the year you borrow the money. So, consider whether repaying loans before year-end is necessary.
9. Are you planning to purchase or sell a corporate assets?
If you’re planning to purchase capital assets, consider buying those assets and putting them to use before business year-end to begin claiming capital cost allowance (CCA) sooner.
If you’re selling capital assets, you might want to delay the sale until after your year-end to claim CCA for one additional year.
10. Does your corporation need a reorganization?
Given the tax rule changes that apply to private corporations, it’s time to revisit your planning if you haven’t already.
It could make sense, for example, to change your share ownership so that different family members own different classes of shares. Why is this? You can potentially pay dividends on certain classes of shares to certain individuals and not others. You’ll have more control over how you distribute dividend income, which can allow you to avoid the Tax on Split Income rules. It can also make sense to issue shares to certain individuals in the family who may not be subject to TOSI rules and do not own any shares today.
11. Have you completed your contributions for TFSA, RESP and RRSP?
You should review the priorities of your savings goal with your advisor. This will sometimes be driven by your tax bracket status.
Wendy & Rami