Now that we are nearing year end, it’s a great time to review your business finances. With no major business tax changes being made this year, 2019 is a good year to make sure you are tax planning, effectively. Please keep in mind that your business may be affected by the recent tax on split income (TOSI) and the passive investment income rules that came into effect in 2018. As these rules can be complicated, please don’t hesitate to consult us and your accountant to determine how this can affect your business finances.

Your corporate year end may not be December 31st and may fall into a different part of the calendar year. This will make you aware of what to consider when you are filing your corporate tax return.

Below, we have listed some of the key areas to consider when tax planning and provided you with some useful guidelines to make sure that you cover all of the essentials. We have divided our tax planning tips into 4 sections:

  1. Tax checklist
  2. Remuneration
  3. Business tax
  4. Estate


1) Business Year End Tax Checklist

Remuneration

    • Salary/Dividend mix
    • Accruing your salary/bonus
    • Stock option plan
    • Tax-free amounts
    • Paying family members

Business Tax

    • Claiming the small business deduction
    • Shareholder loans
    • Passive investment income: eligible/ineligible dividends
    • Corporate reorganization

Estate

    • Will review
    • Succession plan
    • Lifetime capital gains exemption

 

2) Remuneration

  • What’s your salary/dividend mix?

Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your own situation, with the following considerations:

    • Your current and future cash flow needs
    • Your personal income level
    • The corporation’s income level
    • TOSI rules
    • Passive investment income rules


Please also consider the difference between salary and dividends:

Salary Dividend
βœ“ Provides RRSP contribution
βœ“ Reduces corporate tax bill
• Payroll tax
• Canada Pension Plan (CPP) contribution
• Employment Insurance contribution
• Doesn’t provide RRSP contribution
• Doesn’t reduce corporate tax bill
• No tax withholdings
• No Canada Pension Plan contribution
• No Employment Insurance contribution
βœ“ Receive up to $50,000 of ineligible dividends at a low tax rate,depending on province[1],[1] The amount and tax rate will vary based on
province/territory you live in.

 

As part of this, it’s worth making sure that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution. For 2019, salaries of $151,278 will provide the maximum RRSP room of $27,230 for 2020.

  • Is it worth accruing your salary or bonus this year?

You could consider accruing your salary and / or bonus in the current year and delaying payment of it until the following year. If your company’s year end is December 31, your corporation will benefit from a deduction for the 2019 year and the source deductions are not required to be remitted until the actual salary or bonus payment in 2020.

  • Stock Option Plan

If your compensation includes stock options, please check if you will be affected by the new proposed stock option rules. This limits the amount of certain employee stock options eligible for the stock option deduction at $200,000, after December 31, 2019. The rules will not affect you if your stock options are granted by a Canadian controlled private corporation.

  • Tax-Free Amounts

If you own your corporation, pay tax-free amounts, if you can. Here are some ways to do this:

    • Pay yourself rent, if the company occupies space in your home.
    • Pay yourself capital dividends, if your company has a balance in its capital dividend account.
    • Return “paid-up capital” that you have invested in your company.

 

  • Do you employ members of your family?

Employing and paying salary to family members who undertake work for your incorporated business is worth considering as you could receive a tax deduction against the salary that you pay them. In 2019, anindividual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP, and allows for child-care deductions.

 

3) Business Tax

  • Claiming the Small Business Deduction

Are you able to claim a small business deduction? The federal small business tax rate decreased to 9% in 2019 (from 10% in 2018) and is not anticipated to increase in 2020. From a provincial level, there will be changes in the following provinces:

Small Business Tax Rate - source

Province

2019

2020

Difference between 2019 and 2020

Quebec

6%

5%

1%

Prince Edward Island

3.5%

3%

0.5%

Ontario

3.5%

3.2%

0.3%

 

Therefore, a small business deduction in 2019 is worth more than it would be in 2020 for these provinces.

  • Should you repay any shareholder loans?

Loaning funds from your corporation at a low or zero interest rate means that you are considered to have benefited from a taxable benefit at the CRA’s 2% interest rate, less actual interest that you pay during the year or thirty days after it. You need to include the loan in your income tax return, unless it is repaid within one year after the end of your corporation’s taxation year.
For example, if your company has a December 31st yearend and it loaned you funds on November 1, 2019, you must repay the loan by December 31, 2020; otherwise, you will need to include the loan as taxable income in your 2019 personal tax return.

  • Passive investment income

If your corporation has a December year end, then 2019 will be the first taxation year that the new passive investment income rules will apply.

New measures were introduced in the 2018 federal budget, relating to private businesses that earn passive investment income in a corporation and also operates an active business.

There are two key parts to this:

    • Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends in order to receive dividend refunds on some taxes which, in the past, could have been refunded when an eligible dividend was paid.
    • Limiting the small business deduction. This means that, for the companies mentioned above, the small business deduction will be reduced at a rate of $5 for every $1, over $50,000 of earned passive income. . Please note that Ontario and New Brunswick have indicated that they will not follow the federal rules.

If your corporation earns both active business and passive investment income, you should contact us and your accountant directly, to determine if there are any planning opportunities to minimize the impact of the new passive investment income rules.

  • Think about when to pay dividends and dividend type

When choosing to pay dividends in 2019 or 2020, you should consider the following:

    • Difference between the yearly tax rate
    • Impact of tax on split income
    • Impact of passive investment income rules

With the exception of 2 provinces, Quebec and Ontario, the combined top marginal tax rates will not be changing from 2019 to 2020, on a provincial level. Therefore, it will not make a difference if you choose to pay in 2019 or 2020.


Combined Marginal Tax Rate - source

 

Ineligible Dividends (%)

Eligible Dividends (%)

2019

2020

Increase

2019

2020

Increase

Ontario

47.4

47.7

0.3

39.3

39.3

-

Quebec

46.3

47.1

0.8

40.0

40.1

0.1

 

In Quebec and Ontario, because there are slight increases in the combined marginal tax rate, there are potential tax savings available if you choose to pay dividends in 2019 rather than in 2020.

When deciding to pay a dividend, you will need to decide to pay out eligible or ineligible dividends, while also considering the following:

    • Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)
    • Personal marginal tax rate of eligible vs. ineligible dividends

Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends (please note that ineligible dividends can also trigger a refund from the ERDTOH account).

Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind that when ineligible dividends are paid out, they are subject to the small business deduction. As a result, the dividend gross-up is 15%, while eligible dividends that are subject to the general corporate tax rate, have a dividend gross-up of 38%. It’s important to talk to a professional to determine what makes the most sense when determining the type of dividend to pay out of your corporation.


Combined Personal Top Marginal Tax Rate on Dividends - source

 

Ineligible Dividends (%)

Eligible Dividends (%)

Difference (%)

British Columbia

44.64

31.44

13.2

Alberta

42.31

31.71

10.6

Saskatchewan

40.37

29.64

10.73

Manitoba

46.67

37.78

8.89

Ontario

47.40

39.34

8.06

Quebec

46.25

39.99

6.26

New Brunswick

47.75

33.51

14.24

Nova Scotia

48.28

41.58

6.70

Prince Edward Island

45.22

34.22

11.0

Newfoundland and Labrador

44.59

42.61

1.98

Northwest Territories

36.82

28.33

8.49

Yukon

42.17

28.93

13.24

Nunavut

37.79

33.08

4.71

 

Corporate Federal Tax Rate and Gross-up factor - source

 

Ineligible Dividends (%)

Eligible Dividends

(%)

Federal tax rate

9

15

Dividend gross-up factor

15

38

 

  • Corporate Reorganization

It might be time to revisit your corporate structure, given the changes to private corporation rules on income splitting and passive investment income, to provide more control on the distribution of dividend income. Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection (Keep in mind, you don’t want to trigger TOSI, so make sure you structure this properly). If you are considering succession planning, this is the time to evaluate your corporate structure as well.


4) Estate

  • Ensure your will is up to date

If your estate plan includes an intention for your family members to inherit your business, ensure that this plan is tax effective, following new tax legislation from January 1, 2016. In addition, review your will to make sure that any private company shares that you intend to leave won’t be affected by the new TOSI rules.

  • Succession plan

Consider a succession plan to ensure your business is transferred to your children, key employees, or an outside party in a tax efficient manner.

  • Lifetime Capital Gains Exemption

If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (in 2019, the exemption is $866, 912), where the gain is completely exempt from tax. The exemption is a lifetime cumulative exemption; therefore, you don’t have to claim the entire amount at once.

Contact us and your accountant if you have any questions, we can help.