If you are an owner-manager of a Canadian Controlled Private Corporation (CCPC) you can use certain tax planning strategies to optimize both personal taxes and corporation taxes in Canada.
You should always exercise caution while using the below options since there are other factors involved which may impact your tax outcome.
Some of the options which are available to owner-manager or Shareholder-Manager of a Closely held CCPC in Canada include:
Issue a Bonus at year-end
You might already have a salary-dividend mix to withdraw from your corporation. Consider issuing a bonus. A bonus from a corporation can be declared before the Corporation’s taxation year end. Payment of the bonus can be deferred up to 180 days. Corporations can accrue this bonus which is available as a deduction from corporations’ income.
Using a bonus may help to defer the individual tax of the owner-manager. Bonus is considered as Earned Income and increase the room for RRSP contribution for the year.
Optimize Salary-Dividend Mix
As a business owner you are entitled to draw dividends from the corporation. When you work for the corporation, you are also eligible to draw salary for yourself from the corporation.
You should try to optimize your tax liability by creating an optimum salary-dividend mix. While creating this mix, you must take into account effects of payroll taxes, CPP contributions and personal tax brackets.
Family income splitting for Owner-Managers
There are income tax rules related to Split income, generally referred to as TOSI rules. These TOSI rules are complex and need an advice from your corporate tax accountant or a tax lawyer in Canada. In certain cases, you may be able to pay dividends to your family members. For example, if your family members are working for your business (at least 20 hrs a week) you can pay them dividends. Read more details about TOSI rules here.
If your spouse or children are involved in the business and work for your business, (re)consider paying them a reasonable salary for their services. This is especially helpful for the family members with lower income. Such salary payable are also deductible from corporation income on your corporation income tax return. Since salary is an earned income, it helps individuals with contribution to CPP and RRSP.
Pay yourself Tax-Free Amounts from Corporation
You can pay yourself tax-free amounts from your corporation, if you are eligible. For example, if your company occupies an office in your home consider paying yourself rent. In the same way, you can pay yourself Capital dividend out of available capital dividend account or return the share capital which you had invested in your corporation.
Other end of year tax planning options for Owner-managers of CCPCs
For other owner-manager available tax planning options, please consider reading another post End-of year planning for businesses.
As mentioned before, you should exercise caution while using the above tax planning strategies since multiple factors influence each of the above situation. There are resources available on the Canada Revenue Agency’s website and you can use them. However, it is highly recommended to use a tax adviser in Canada who specializes in personal taxes and corporate income tax services. Maroof HS CPA Professional Corporation provide comprehensive tax services in Canada to both individuals and businesses. You can get in touch to discuss tax planning for you or your corporation in Canada.