It’s that time again. The year is almost done, and it’s time to take advantage of tax-planning strategies that will reduce your income tax burden for the 2018 tax year. We’ve collected the top 2018 tax-reduction strategies from our Canadian tax lawyers.
Top 2018 Tax-Planning Tips for Businesses
Take advantage of business tax planning strategies that will reduce your income tax burden for the 2018 tax year.
Time Your Expense Claims
Taxpayers earning business income should accelerate and incur their deductible expenses before the year-end rather than realizing those expenses in 2019. Employees may write off depreciation on cars, planes, and musical instruments. Likewise, tradespersons and apprentices can deduct the cost of their tools—to a prescribed limit.
Similarly, individuals should make their purchases now so that they may enjoy the benefit of the corresponding depreciation claim this year. Purchase your capital property before the tax year end in order to claim Capital Cost Allowance (CCA)—at 50% of full rate—this year.
Claim Your Allowable Business Investment Losses (ABIL)
An Allowable Business Investment Loss is a loss on an investment on a small business’s shares or debt. A taxpayer may deduct an ABIL from any source of taxable income. Standard capital losses, in contrast, are only deductible against capital gains.
To claim your allowable business investment losses this tax year, you must sell the investment shares or establish the investment debt as reasonably uncollectible.
Pay Out Bonuses to Enjoy the Small Business Deduction
A Canadian Controlled Private Corporation (CCPC) enjoys a reduced income tax rate on its first $500,000 of active business income. A bonus declaration is a key tax strategy for CCPCs with active business income exceeding $500,000. In particular, to the extent that its income exceeds $500,000, the corporation declares a bonus to its owner-manager.
This bonus must be paid and all payroll deductions remitted within 180 days of the company’s year-end. If the company fails to pay the bonus within this deadline, it cannot deduct the bonus in the year of declaration. This means that the corporation would fail to “bonus down” its income and thus incur tax at the general corporate rate on the amount exceeding the $500,000.
Pay a Reasonable Salary to Your Spouse or Family Member
A business owner may pay a reasonable salary to a spouse or family member working for the business. This effectively splits income and lowers the overall household tax rate, and it provides family members with RRSP contribution room.
A salary paid to a family member employee must be reasonable given the tasks that the employee performs. In case of a future tax audit, the business owner must produce proper books and records. So, taxpayers must ensure strict compliance with the record-keeping requirements of Canada’s Income Tax Act to avoid tax problems.
Give Your Employees Non-Taxable Gifts
A business owner may deduct business expenses of up to $500 annually for non-cash gifts given to each arm’s length employee. But if you give your employee more than $500 worth of gifts in a year, the employee must include the excess in his or her income as a taxable benefit, and you must withhold CPP and income tax on that amount. Moreover, the $500 annual allowance does not apply to cash gifts or performance-related awards.
Similarly, once every five years, an employer may deduct $500 for non-cash long service awards or anniversary awards given to each employee. The Canada Revenue Agency (CRA) requires the award to be for a minimum of 5 years’ service and, you must wait at least 5 years before giving another award to the same employee.
Enhance Your Compensation Strategy
A compensation strategy includes a mix of salary, bonuses, and dividends. In particular, a bonus allows income—and thus the related tax liability—to be deferred until after the year-end. A corporation can immediately deduct the amount of a declared bonus if it pays the bonus within the statutory deadline. Meanwhile, the recipient only needs to report the bonus when he or she receives it, which could be in the new year. So, if arranged properly, the bonus provides an accelerated deduction at the corporate level and a deferred inclusion at the personal level.
Repay Shareholder Loans from Your Corporation
When you borrow funds from your own corporation, those funds are included in your taxable income if the loan remains outstanding for two corporate year-ends. So, you must ensure that you repay shareholder loans before this deadline.
Avoid or Reduce Interest Fees on Tax-Installment Payments
If you make quarterly tax-installment payments, you can avoid interest charges by making your final payment on or before December 15, 2018. Likewise, if you missed an earlier installment payment deadline, you can reduce interest by either increasing the amount of your final installment payment or paying your final installment earlier than the December 15th deadline.
Consider the Individual Pension Plan (IPP)
Owner-employees of incorporated businesses can pursue an Individual Pension Plan (IPP) as a means of retirement saving. The IPP provides an opportunity for year-end corporate income tax deductions for the corporation’s contributions to the plan.
Top 2018 Tax-Planning Tips Using Charitable Donations
Pay Attention to Your Deadline
If you wish to claim your donation tax receipt on your 2018 income tax return, you must donate to your registered charity by December 31, 2018.
If you donate after this deadline, you will need to wait until 2019 to claim your donation tax receipt. You will also lose out on your last chance to claim the first-time donor’s super credit.
Donate Securities to Avoid Potential Taxable Gains
Instead of donating cash, you can donate publicly-listed securities to a qualified charity. You’ll receive a donation tax receipt equal to the fair market value of the security at the time of the donation. In addition, by donating the securities to a registered charity, you won’t incur tax on the accrued gain. (Gifting the securities to a non-qualified donee would result in a disposition at fair market value and thus a taxable gain if the market value exceeds cost.)
If you plan on donating securities—and wish to receive the tax credit this year—the transfer must take place before December 31st. As a result, you should start this process soon to allow time for processing and settlement time, which typically takes at least five business days.
Don’t Forget About Your Corporation
You may want to consider making donations through your corporation if you own one. Individuals get donation tax credits, but corporations can deduction donations from taxable income. Moreover, donations of capital property can increase the capital dividend account of your private corporation. Your corporation can then pay this amount to you tax-free.
Note: you’ll need to compare the benefits of donating personally versus through your corporation. Personal donations might result in greater tax benefits due to the lower corporate tax rates.
Gift Your Life Insurance
You can make a donation of a whole-life insurance policy, which is a policy combining insurance with an investment fund. You donate by transferring ownership of the policy to the charity and by naming the charity as the policy beneficiary.
Generally, the tax value of the donation is the policy’s fair market value minus any outstanding policy loans. But, if the tax value exceeds your tax cost of acquiring the policy, you must report the excess as income.
After donating the policy to a charity, you may claim your subsequent premium payments on the policy as additional charitable donations.
Finally, your estate may be able to claim a donation tax credit if you name a charity as a beneficiary of your life insurance in your will. The estate can claim the credit in either your terminal tax return or your tax return for the year before your terminal year. Similar rules apply if your will names a charity as the beneficiary of your RRSP or RRIF.