There are many ways small business owners can optimize their corporate income taxes for 2020.
This post is for the small to medium-sized businesses operating in the corporate form. Further, we do not recommend relying solely on this post for corporate tax planning purposes. It is always better to consult your corporate tax accountant to get wholesome tax advice.
Government Support to Canadian Small Businesses in 2020
Due to the pandemic, many small businesses have gone through a lot of financial stress. There are many government programs providing support to Canadian businesses in 2020 and 2021. These loans, subsidies and other support programs do have a tax impact on these businesses as well.
Before we go to some tax planning tips for corporations in Canada, let’s have a quick look at covid-19 related measures.
CEBA – Make sure to transfer the funds from Line of Credit
One of the most popular programs is Canada Emergency Business Account a.k.a CEBA.
The attractiveness of this small business loan program is that it offers a forgivable portion of $10,000 (and 20,000 if topped up to $60,000). Now, this forgiveness comes with certain conditions. One of them is that the outstanding loan account balance requirement as of 12/31/2020. So, if you have not utilized the line of credit, make sure you transfer the funds from the line of credit to a checking account.
Forgivable loan portions are generally taxable, consult your corporate income tax adviser to determine when this will be included in your taxable income!
Canada Emergency Wage Subsidy (CEWS)
A direct cash subsidy from the Federal government has helped many businesses stay afloat.
- The amounts received as subsidies are included in corporations’ taxable income, hence, taxed.
- You can apply for CEWS retrospectively. So if you have not done it before, it’s a good time to complete your bookkeeping and check eligibility.
- CEWS audits have already started to ensure that your books are up-to-date and ready for the audit.
Temporary Wage Subsidy (TWS)
If you did not claim a 10% temporary wage subsidy, you can still do so. This can help to reduce your payroll remittances to CRA. TWS is also taxable and affects the amounts available under CEWS.
Canada Emergency Rent Subsidy (CERS)
Get assistance from the government in the form of Rent subsidy (CERS) CERS is a CEWS-styled subsidy for eligible rental expenses. If you have not applied already, you can apply for the same. Like CEWS, CERS is also taxable.
Salary-Dividend Mix & Dividend Payments
Create a Salary-dividend mix for you and/or your family members. There is still time to send the last payroll remittance of 2020 that will be due on Jan 15, 2021. You can issue a salary to you and/or your family members working in the business.
- If the family members work for the business, paying them salaries enable them to have earned income.
- You can pay dividends to adult family members who are also shareholders in the corporation. If dividends are the only income, they may receive up to $53,000 appx without paying any additional personal income tax. The amounts are different for both eligible and non-eligible dividends.
- If you are planning to pay dividends to family members, be aware of the Tax on split income (TOSI) rules.
- Do not withdraw cash from your corporation if not needed, try to retain the cash in the business. If you always have excess income and worried about cash piling up in your corporation, considered a tiered corporate structure to move dividends tax-free to the holding corporation.
TOSI rules are complicated rules so you must consult a corporate tax adviser before making such decisions.
Use Bonus as Tax Deferral Tool
A bonus payable can give a corporate tax deduction without an actual bonus payment in the current fiscal year. Such a bonus must be paid within 179 days. Such an accrual can reduce corporate income tax in the current fiscal year whereas goes into personal taxes of receiver in the next tax year.
Prepare to file Information Returns on Time
Not filing information returns on time can result in significant penalties. These penalties are often calculated on per day basis and charged on per slip. The most common information returns are Employer information returns such as T4 and T4As, T5 information returns when you issue dividends, T5018 for contractor payments in the construction industry, and Non-resident information returns.
If you have not already paid the required instalments, both income tax and sales tax, pay them to avoid interest and penalties. Always check the updated information on the CRA website for the deferrals due to Covid-19.
Review your Corporation’s QSBC Status
There is Lifetime Capital Gain Exemption (LCGE) available to Canadian individual taxpayers. The 2020 limit is $883,384 on the sale of shares of Qualified Small Business Corporation (QSBC). Review your corporate structure to ensure that your small business corporation remains QSBC. If you pile up passive investments or forgo dividends and bonuses, you may lose the QSBS status if substantially all of your assets are not used to generate active business income.
If you are planning expansion outside Canada, incorporate separate businesses. Move excess cash (retained earnings) to holding companies. And, if possible, crystallize the LCGE.
Watch for Passive Investments in your CCPC
Generating passive investment income of more than $50,000 in CCPC (along with other associated CCPCs) can affect your ability to access Small business deduction (SBD). Ensure that passive investment income stays less than 50,000.
Every $1 above $50,000 reduces $5 of the small business deduction limit. So, if passive investment income is more than $50,000, it starts reducing SBD. At $150,000 of passive investment income of a CCPC (or CCPCs) the SBD is zero.
If you have portfolio investments that have appreciated in value, consider deferring the realization of capital gains.
Settle Shareholder Loans
If you borrowed funds from your corporation, you must ensure that you settle this within one year of first it appeared on the balance sheet. Shareholder loans are included in personal taxes if not repaid within one year. This income inclusion is for the year when that loan was actually taken.
Purchase Capital Assets
If you plan to purchase capital assets anytime soon such as office furniture, computer equipment or machinery consider buying before Dec 31. You can still claim capital cost allowance (CCA) for half-year. This CCA may allow lowering your corporate income taxes.
Update your GST/HST Reports
Run the sales tax reports on your bookkeeping software. Make sure you have enough documentation to support your ITCs.
Do not forget to calculate the GST/HST impact of management fees and other intercompany charges. You can avoid this by filing an election for your closely related businesses so that you do not have to charge GST/HST each time.
Check if you made in-kind donations to eligible charities, have you charged GST/HST to them as well.
Other Important Things to Know
Some of the other important things to keep in mind are:
- Update corporate minutes with beneficial owners’ information for federal corporations.
- Careful about the “Avoidance Transactions”. Avoidance transactions, which are tax-motivated transactions, must be reported to CRA.
- Monitor your taxable capital to avoid losing access to small business deduction and enhanced 35% SR&ED ITC rate.
- File your Scientific research and experimental development (SR&ED) claim by the deadline. There are extensions available due to the pandemic.
- Check other provincial and territorial tax incentives available for you. Such as SR&ED, media tax incentives, manufacturing and processing investment tax credits, or other covid-19 related benefits.
- Include foreign accrual property income (FAPI) if your corporation (or you) owns more than 50% voting rights of a foreign corporation.
- If you sell on an eCommerce platform such as Amazon FBA in the U.S., ensure you file protective returns for your Canadian Corporation in the U.S.
- Check if your corporation is subject to the foreign reporting requirements, transfer pricing rules or Thin capitalization. Discuss with your corporate tax adviser.
Maroof HS CPA Professional Corporation provides corporate income tax planning and tax preparation services in Canada. Get in touch with us to help you with all your tax and accounting needs.