Corporate Tax Planning
Private Company Corporate Tax Savings
If you are an owner of a private company and your fiscal year end is approaching, you will want to ensure that your corporate taxes are under control prior year end. There are a few tax planning strategies that can be utilized after year end, such as accruing a management bonus to “bonus down” to the small business deduction limit $500,000 of taxable income. However, most corporate tax planning takes place during the fiscal year end in the last quarter of the year.
Common expenditures for corporate tax savings:
Advertising and Meals and Entertainment – if you would like a jump start on promoting your business if the budget was to advertise more in the next fiscal, it would be wise to get ahead start and incur those costs in later part of the current fiscal period. This way you can take advantage of the deduction this year and which will result in lower corporate taxes. Advertising is fully deductible when the expense is incurred. Most meals and entertainment expenses for business purposes are only 50% deductible for tax purposes. However, CRA allows a 100% deduction when meals and entertainment expenses are incurred to provide a party, such as a Christmas party or event to which all employees from a particular location are invited. There is a limit of 6 events per year that can qualify.
Capital assets purchased late in the year – if your company is planning to make capital purchases early in the next fiscal period, purchasing capital assets later in the current year offer the company a large CCA (tax amortization) write. For example, you can deduct 6 months of CCA even though the business only owned the asset for say 1 or 2 months.
Management Bonus –accruing a management bonus to “bonus down” to the small business deduction limit $500,000 of taxable income. This results in deferring corporate taxes in the current fiscal year as you receive the deduction for the management bonus expense, however the company doesn’t have to pay out the management bonus to its management team until 60 days after year end. Therefore, you are also deferring when the personal tax is liable for the management team as well.
Tax Strategies for re-investment of surplus profits:
Using a Holding company to pay Inter-company dividends –As income is generated from the operating and there are surplus profits the company is not utilizing; you can transfer funds to a holding company in the form of inter-company dividends tax free. Inter-corporate dividends flow tax free based on safe income attributing and accruing to each class of shares of the operating company. Safe income must be considered in order to pay an inter-corporate dividend under the new rules of subsection 55 (2). You will have to determine the safe income exception, which applies to a dividend that did not exceed the after-tax retained earnings.
Please note: inter-company dividends paid without safe income will have adverse tax implications, i.e. taxed at the highest marginal dividend tax rate.
Inter-company dividends can be paid from the operating company to the holding company to allow to re-investment accordingly. Leaving funds in a holding company that you do not require personally results in a tax deferral and you have more funds for other investments.