Business Owners: 2019 Tax Planning Tips for the End of the Year

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

We are also assuming that your corporate year end is December 31, however if it’s not, this is useful when your business year end comes up.

Below, we have listed some of the key areas to consider 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 consider the following factors:

  • 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

✓ Provides RRSP contribution

✓ Reduces corporate tax bill

• Payroll tax

• Canada Pension Plan (CPP) contribution

• Employment Insurance contribution

Dividend

• Doesn’t provide RRSP contribution

• Doesn’t reduce corporate tax bill

• No tax withholdings

• No Canada Pension Plan contribution

• No Employment Insurance contribution

✓ Receive up to $50,000 of ineligible dividends at a low tax rate depending on province

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. 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 but 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 year 2019 and the source deductions are not required to be remitted until 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 caps 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 so:

  • 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, providing that said salary is “reasonable” in relation to the work done. In 2019, the individual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allow for child-care deductions. Bear in mind additional costs that are incurred when employing someone, such as payroll taxes and contributions to CPP.

3) Business Tax

Claiming the Small Business Deduction

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

Small Business Tax Rate

Therefore, a small business deduction in 2019 is worth more than 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 year-end 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 may apply to your company.

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

There are two key parts to this, as follows:

  • 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 can be reduced at a rate of $5 for every $1 over between $50,000 and $150,000 of investment income, or eliminated if investment income exceeds $150,000. 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

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, you should consider 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, when ineligible dividends are paid out, they are subject to the small business deduction, therefore the dividend gross-up is 15% while eligible dividends that are subject to the general corporate tax rate have a dividend gross-up is 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

Corporate Federal Tax Rate and Gross-up factor

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

In particular, 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 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.

The issues we discussed above can be complex. Contact us and your accountant if you have any questions, we can help.

The Importance of a Financial Plan

Working with us to create your financial plan helps you identify your long and short term life goals. When you have a plan, it’s easier to make decisions that align with your goals. We outline 8 key areas of financial planning:

  • Income: learn to manage your income effectively through planning

  • Cash Flow: monitoring your cash flow, will help you keep more of your cash

  • Understanding: understanding provides you an effective way to make financial decisions that align with your goals

  • Family Security: having proper coverage will provide peace of mind for your family

  • Investment: proper planning guides you in choosing the investments that fit your goals

  • Assets: learn the true value of your assets. (Assets – Liabilities)

  • Savings: life happens, it’s important to have access to an emergency fund

  • Review: reviewing on a regular basis is important to make sure your plan continues to meet your goal

Easy Exit: Business Succession in a Nutshell

Getting into the world of business is a meticulous task, but so is getting out of it Whether you’ve just hit the ground running on your business or if you’ve been at it for a long time, there is no better time to plan your exit strategy than now. Although the process may seem taxing, we’ve answered a few questions you may have about planning your business succession strategy. 

1. Who do I talk to about this? 

Deciding on how to go about the transition requires careful planning, and you need to consult no less than people who are well equipped to help you out. First, talk to your key advisors such as bankers and financial partners. You could also use some advice from your accountant and lawyers. If your company has an advisory board, better consult them as well. You may also hire a specialist or a consultant, depending on how you choose to go about your business succession plan. 

2. Who should I choose as a successor? 

There are several ways to go about this, and your decision will ultimately be your personal choice. You may pass on your business to a family member or to your top executives or managers. You may also choose to sell it to an outsider. Whichever path you choose, you can also decide on how much you want to be involved in the business after you pass it on. That is, if you want to be involved at all. 

3. When should I inform my successor about my plans? 

While a surprise inheritance may be heartwarming, it’s not the same with inheriting a business. Getting a successor ready—whether it’s a family member or someone from your company—requires careful planning and training. As soon as you’ve chosen a successor, better get started on getting them ready for the big shoes they’re about to fill. This includes helping them equip themselves with the necessary skills, knowledge and qualifications necessary to run your business. 

4. How do I plan the transition itself? 

The transition will be twofold—transferring ownership and handing over the business itself. As far as transferring ownership is concerned, you need to consider legal and financial details. These include valuation, financing and taxation. You also need to consider if you wish to keep your current legal structure (corporation, sole prop, partnership, etc.) or if you (or your successor) would like to change it. You also need to plan how to prepare various stakeholders in the business for the transition. How will you prepare your customers, clients, and employees? What would be their level of involvement? Make sure that you put different strategies in place in order to ensure transparency and consistency in communicating changes in your business, especially something as drastic as succession. 

5. Now that I have a business succession plan ready, can I go back to business as usual? 

Not really. Your business and your customers’ needs may change over time. This means that you need to keep reviewing and adjusting your plan as your business also evolves. 

10 Essential Decisions for Business Owners

10 Essential Decisions for Business Owners

Business owners can be busy… they’re busy running a successful business, wearing lots of hats and making a ton of decisions. We’ve put together a list of 10 essential decisions for every business owner to consider.

10 essential decisions for a business owner from considering corporate structure to retirement and succession planning. 

The essential questions include:

  • Best structure for your business (ex. Sole Proprietor, Corporation, Partnership)

  • Reduce taxes

  • What to do with surplus cash

  • Build employee loyalty

  • Reduce risk

  • Deal with the unexpected

  • Retire from your business

  • Sell your business

  • Keep your business in the family

  • What to do when you’re retired

As a financial advisor, we are uniquely positioned to help business owners, talk to us about your situation and we can provide the guidance you need.

The Difference between Segregated Funds and Mutual Funds

Segregated Funds and Mutual Funds often have many of the same benefits such as:  

  • Both are managed by investment professionals. 

  • You can generally redeem your investments and get your current market value at any time. 

  • You can use them in your RRSP, RRIF, RESP, RDSP, TFSA or non-registered account. 

So what’s the difference? Who offers these products? 

  • Segregated Funds: Life Insurance Companies

  • Mutual Funds: Investment Management Firms

Why is this important?  

  • Since Segregated funds are offered by life insurance companies, they are individual insurance contracts. Which means….

  • Maturity Guarantees

  • Death Benefit Guarantees

  • Ability to Bypass Probate

  • Potential Creditor Protection

  • Resets

  • Mutual Funds do not have these features.

What are these features?

Maturity and Death Benefit Guarantees mean the insurance company must guarantee at least 75% of the premium paid into the contract for at least 10 years upon maturity or your death. 

Resets means you have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment.

Bypass Probate: since you name a beneficiary to receive the proceeds on your death, the proceeds are paid directly to your beneficiary which means it bypasses your estate and can avoid probate fees. 

Potential Creditor Protection is available when you name a beneficiary within the family class, there are certain restrictions associated with this. 

What are the fees?  

  • Segregated Funds: Typically higher fees (MERS)

  • Mutual Funds: Typically lower fees

We can help you decide what makes sense for your financial situation. 

The Value of Financial Advice

 

“If it has a price, it must have value.”

This study, based on a new Canadian survey and adjusting for the causality issue, reconfirms the positive value of having financial advice. As in our earlier paper, the discipline imposed by a financial advisor on households’ financial behavior and increased savings of adviced households are to improving asset values of households relative to comparable households without an advisor. Benefitting from a subset of participants in both surveys, dropping an advisor between 2010 and 2014 was costly: those households lost a significant percentage of their asset values while the households who kept their advisor have gained in asset values.

To learn more, read the paper.  

 

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Estate Planning for Business Owners

Writing an estate plan is important if you own personal assets but is all the more crucial if you also own your own business. This is due to the additional business complexities that need to be addressed, including tax issues, business succession and how to handle bigger and more complex estates. Seeking professional help from an accountant, lawyer or financial advisor is an effective way of dealing with such complexities. As a starting point, ask yourself these seven key questions and, if you answer “no” to any of them, it may highlight an area that you need to take remedial action towards.

  • Have you made a contingency plan for what will happen to your business if you are incapacitated or die unexpectedly?
  • Have you and any co-owners of your business made a buy-sell agreement?
  • If so, is the buy-sell agreement funded by life insurance?
  • If you have decided that a family member will inherit your business when you die, have you provided other family members with assets of an equal value?
  • Have you appointed a successor to your business?
  • Are you making the most of the lifetime capital gains exemption ($835,714 in 2017) on your shares of the business, if you are a qualified small business?
  • Are you taking care to minimize any possible tax liability that may be payable by your estate in the event of your death?

Estate freezes

The process of freezing the value of your business at a particular date is an increasingly common way of protecting your estate from a large capital gains tax bill if your business increases in value. To achieve this, usually the shares in the business that have the highest growth potential are redistributed to others, often your children, meaning that they will be liable for the tax on any increase in their value in the future. In exchange, you will receive new shares allowing you to maintain control of the business with a key difference – the value of the shares is frozen so that your tax liability is lower and that of your estate when you die will also be reduced.

2019 Federal Budget

2019 Federal Budget

The 2019 budget is titled “Investing in the Middle Class. Here are the highlights from the 2019 Federal Budget.

We’ve put together the key measures for:

  • Individuals and Families

  • Business Owners and Executives

  • Retirement and Retirees

  • Farmers and Fishers

Individuals & Families

Home Buyers’ Plan

Currently, the Home Buyers’ Plan allows first time home buyers to withdraw $25,000 from their Registered Retirement Savings Plan (RRSP), the budget proposes an increase this to $35,000.

First Time Home Buyer Incentive

The Incentive is to provide eligible first-time home buyers with shared equity funding of 5% or 10% of their home purchase price through Canada Mortgage and Housing Corporation (CMHC).

To be eligible:

  • Household income is less than $120,000.

  • There is a cap of no more than 4 times the applicant’s annual income where the mortgage value plus the CMHC loan doesn’t exceed $480,000.

The buyer must pay back CMHC when the property is sold, however details about the dollar amount payable is unclear. There will be further details released later this year.

Canada Training Benefit

A refundable training tax credit to provide up to half eligible tuition and fees associated with training. Eligible individuals will accumulate $250 per year in a notional account to a maximum of $5,000 over a lifetime.

Canadian Drug Agency

National Pharmacare program to help provinces and territories on bulk drug purchases and negotiate better prices for prescription medicine. According to the budget, the goal is to make “prescription drugs affordable for all Canadians.”

Registered Disability Savings Plan (RDSP)

The budget proposes to remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit. (DTC) and the requirement for medical certification for the DTC in the future in order for the plan to remain open.

This is a positive change for individuals in the disability community and the proposed measures will apply after 2020.

Business Owners and Executives

Intergenerational Business Transfer

The government will continue consultations with farmers, fishes and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses.

Employee Stock Options

The introduction of a $200,000 annual cap on employee stock option grants (based on Fair market value) that may receive preferential tax treatment for employees of “large, long-established, mature firms.” More details will be released before this summer.

Retirement and Retirees

Additional types of Annuities under Registered Plans

For certain registered plans, two new types of annuities will be introduced to address longevity risk and providing flexibility: Advanced Life Deferred Annuity and Variable Payment Life Annuity.

This will allow retirees to keep more savings tax-free until later in retirement.

Advanced Life Deferred Annuity (ALDA): An annuity whose commencement can be deferred until age 85. It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.

Variable Payment Life Annuity (VPLA): Permit Pooled Retirement Pension Plans (PRPP) and defined contribution Registered Retirement Plans (RPP) to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.

Farmers and Fishers

Small Business Deduction

Farming/Fishing will be entitled to claim a small business deduction on income from sales to any arm’s length purchaser. Producers will be able to market their grain and livestock to the purchaser that makes the most business sense without worrying about potential income tax issues. This measure will apply retroactive to any taxation years that began after March 21, 2016.

To learn how the budget affects you, please don’t hesitate to contact us.

Tax Lines to Look Out for 2018 Income Tax Year

Tax Lines to Look Out for:

2018 Income Tax Year

It’s that time of year again, when many of us sit down to complete our income tax return and hope that we have done enough preparation to ensure a smooth tax return. We’ve outlined the key lines to look out for in the 2018 Income Tax Year:

Expenses relating to medical expenses have been expanded to include service animals and can be claimed for non-refundable tax credit. You should also be aware that you can claim for yourself, your spouse or common law partner and any dependent children under the age of 18.

Tax on Split Income (TOSI) (Line 424)

As of January 1, 2018, in addition to applying to certain types of income of a child born in 2001 or later, TOSI may now also apply to amounts received by adult individuals from a related business.

Interest Expense & Carrying Charges (Line 221)

Any fees paid for specific advice about your investments or for tracking your income from investments.

Any fees paid for management of your investments, except administration fees paid for your registered retirement savings plan or registered retirement income fund.

Interest you paid to borrow when borrowing to invest for investment income only except if investment income is considered capital gains.

Insurance policy loan interest you paid in 2018 to make income. To claim this amount, the insurance company must complete Form T2210 before your tax return deadline.

Carry forward information (Line 208 and 253)

If you are not deducting all your RRSP contributions you made in 2018 and the beginning of 2019, your unused contributions can be carried forward.

Generally, if you had an allowable capital loss in a year, you have to apply it against your taxable capital gains for that year. If you still have a loss, it becomes part of the computation of your current year net capital loss. You can use a current year net capital loss to reduce your taxable capital gains in any of the 3 preceding years or in any future year. Capital losses can be carried forward indefinitely and are only deductible against capital gains.

Charitable Donations

As of January 1, 2018, the first-time donor’s super credit has been eliminated.

If you owe money when your income tax return is complete, the only way to delay payment is to delay the filing until the April 30th deadline. Alternatively, if CRA owes you money, then file as early as possible.

This article and infographic are for illustrative purposes only. You should always seek independent legal, tax, financial and accounting advice with regard to your situation.