When most of us think of year-end tax planning, we typically consider our personal situation. Yet, there are many tax-opportunities for business owners to explore as we near the end of another calendar year.
The following tips assume your business is unincorporated or your corporation has a December 31st year-end, although some tips may also apply to corporations with an off-calendar year-end.
- Review your salary/dividend mix: If your business is incorporated, you’ll want to determine the optimal mix of salary and/or dividends to pay yourself. The corporation may be able to pay you different types of dividends, with some having more preferential tax treatment while other dividends may actually be eligible to be paid to you tax free. In other cases, paying a salary may prove to be more beneficial. Many factors affect the salary/dividend decision, both tax and non-tax, which makes it unique to you. This decision needs to be made prior to the end of the year and should be made in consultation with your tax professional.
- Consider accruing a bonus this year but paying it next year: A bonus accrued in 2022 but paid within 180 days after the business year-end is deductible to the corporation in the current year, but only included in your taxable income in the year you receive it. Assuming a December 31 year-end, the business would get a deduction for the bonus accrued in 2022. However, you won’t have to include the amount in your income until you file your personal tax return for 2023 early in 2024, resulting in a significant tax deferral.
- Look at salaries to family members: If your spouse or common-law partner and/or child is involved in your business (incorporated or not), consider paying them a reasonable salary for the services they provide. This can shift income into the hands of family members who may pay tax at lower rates, resulting in less tax paid than if this remuneration were paid to you. If those same family members are shareholders of your corporation, proceed with caution if considering paying them dividends. Restrictive tax rules impose high tax rates on dividends paid to family member that do not meet certain conditions.
- Time the purchase and sale of depreciable assets: If your business is going to be purchasing depreciable assets, the acquisition should likely occur prior to December 31st (assuming a December 31st year end). Accelerating the purchase provides two benefits: you’ll be able to claim capital cost allowance (CCA) as a tax deduction a year earlier (albeit at half the normal CCA rate due to the half-year rule), and you’ll be able to claim the full CCA rate next year since the half-year rule only applies in the year of acquisition. To be able to claim CCA, the asset must not only be acquired, but it must be available for use prior to year-end.
On the other hand, if you’re considering selling depreciable assets in your business that you’ve depreciated in prior years which would result in taxable recaptured CCA, it may be wise to delay the sale until next year (2023). This allows for the business to claim one more year of CCA in 2022, plus you’ll defer the taxable recapture until 2023.
There are many year-end tax planning opportunities for both you and your business. For more information, please speak with your IG Consultant. Also ask for IG Wealth Management’s 2022 Year-end Tax Planning Checklist for Business Owners.