Six Tips to Help Keep the Taxman at Bay
By Bo Mocherniak
As the end of another year approaches, it's important to review your tax situation to make sure you're doing everything you can to reduce your tax liability. Tax rules are constantly changing, and staying abreast of them will not only help ensure you're in compliance with the law, but that you're able to benefit from a wide range of tax mitigating strategies. With that in mind, you might consider the following planning ideas:
Salary, Bonus or Dividends? What's the Right Compensation Strategy for You?
If you're the owner-manager of a closely held Canadian-controlled private corporation, you should consider the mix of salary, bonus and dividends in your compensation package. A bonus is often preferred over salary, since the payment can be deferred until after the company's year-end. You may also opt to receive part of your remuneration in the form of dividends. Certain dividends qualify as "eligible dividends," which are subject to a lower tax rate than other (regular) dividends.
Where Possible, Income Split With Other Family Members
If you have family members employed in your business or as shareholders of your corporation, either directly or indirectly (through a family trust), there can be significant tax savings to splitting income-paying dividends to certain lower income family members, for example. In addition, if your spouse and/or children work for you, paying them a reasonable salary or bonus may allow you to take advantage of their lower marginal tax rate, and give them earned income for CPP and RRSP purposes.
Acquiring and Disposing of Assets-Understand the Tax Implications
In general, if you are planning to purchase an asset, you should acquire it before the end of your fiscal year. On the other hand, the disposal of assets that have appreciated in value can create significant income tax liabilities. As such, you should generally dispose of an asset at the beginning of the next fiscal period. If you are constructing a new building, or an addition to an existing building, check with your tax adviser to determine if any planning can be done to accelerate the write-off of the costs for tax purposes.
To Incorporate or Not Incorporate
If you're currently carrying on business as a sole proprietor or in an unincorporated partnership, consider whether you should transfer your business to a corporation. While many of the benefits offered by incorporation depend upon your circumstances, such as the amount of income you earn, the benefits can include: the ability to have income taxed at a relatively low rate, a tax deferral to the extent you are able to retain the income in the corporation, and the ability to benefit from the capital gains deduction on the disposition of the corporation's shares. Additionally, most business assets can be transferred to a corporation on a tax-deferred basis.
Bare Trusts, Nominee Corporations and Joint Ventures
Many real estate investments are held in a joint venture (JV) arrangement. Instead of having each JV participant reporting their share of the GST/HST to the CRA, the JV participants may elect an "operator" to report the tax. The operator must be an investor/participant, or a person with managerial or operational responsibilities within the JV. In many cases, the accounting for GST/HST has been administered by a bare trust or nominee corporation, which does not generally qualify to be an operator of the JV for GST/HST reporting purposes. The CRA has offered temporary administrative relief for reporting periods up to December 31, 2014, provided certain conditions have been met. Therefore, the use of bare trusts or nominee corporations to report the tax will no longer be allowed after 2014.
Selling a Business? Defer Tax By Reinvesting the Proceeds in Another Small Business
If you realize a capital gain on the sale of an eligible small business investment, and invest some or all of the proceeds in another eligible small business investment, you can defer taxation on some or all of the gain. To qualify, the proceeds must be reinvested in an eligible business at any time during the year of disposition or within 120 days after the year-end. Eligible investments are newly issued common shares in a small-business corporation with assets (including assets of related corporations) not exceeding $50 million immediately before and after the investment.
While these tips aren't a substitute for the recommendations of a personal tax advisor, and individual circumstances vary, they can help you begin the conversation with your professional adviser.
With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP. He can be reached at firstname.lastname@example.org.