Canada: 2016 Year-End Tax Planning Guide

Last Updated: November 16 2016
Article by Grant Thornton

Nobody likes to pay too much tax. Luckily, there are a number of tax-saving measures that can help with just that—both for businesses and individuals. But, in order to capitalize on these opportunities, now's the time to review your 2016 tax situation to see if any apply to you.

Salary, bonus or dividends? What's the right compensation strategy for you?

If you're the owner-manager of a closely held Canadian-controlled private corporation (CCPC), you should consider the mix of salary, bonus and dividends in your compensation package. A bonus is often preferred over salary, since the payment can be deferred until after the company's year-end. Salary and bonus are both considered earned income which is used to calculate your RRSP contribution limit for the subsequent year. For 2016, you will need earned income of $144,500 to make the maximum RRSP contribution for the 2017 tax year of $26,010.

If your spouse and/or children work for you, consider paying them a reasonable salary or bonus as well. This will be beneficial where their marginal tax rate is lower than yours. In addition, it will give them earned income for CPP and RRSP purposes.

Owner-managers of private corporations often declare a bonus at year-end to reduce the corporation's income to the amount that qualifies for the small business deduction. However, a corporation can also pay dividends to its shareholders. Certain dividends qualify as "eligible dividends," which are subject to a lower rate of tax than other (regular) dividends.

For a dividend to be an eligible dividend, it must be designated as such in writing by the corporation paying the dividend. Late-filed designations may be permitted in certain limited situations, provided that the corporation makes the designation no later than three years following the day on which the dividend was paid. Consult with your tax advisor if you want to make a late-filed eligible dividend designation.

Watch your company's taxable capital—aim to maximize the small business deduction.

The first $500,000 of federal active business income of CCPCs receives preferential tax treatment by qualifying for the small business deduction. This deduction begins to be phased out where a corporation's taxable capital (on an associated corporation basis) for the prior taxation year exceeds $10 million and is completely eliminated if it exceeds $15 million. In general, the taxable capital of a corporation is equal to its retained earnings, share capital and long-term debt. As a result, the small business deduction may be reduced for corporations with a significant amount of debt financing.

The taxable capital of a corporation is determined at its year-end. If your company's taxable capital is likely to exceed $10 million, there are strategies available to reduce this amount.

Have you borrowed funds from your corporation?

In general, to avoid tax consequences, debts you owe to your corporation have to be repaid within one year following the end of the corporation's taxation year during which the loan or advance was made to you. However, there are exceptions to this rule. If you have borrowed an amount from your corporation, you should review the tax consequences with your Grant Thornton tax advisor.

Acquiring and disposing ofassets— understand the tax implications.

If you are planning to purchase an asset, you should generally acquire it before the end of your fiscal year. However, to benefit from a tax deduction, the asset must be "available for use." On the other hand, the disposal of assets that have appreciated in value can create significant income tax liabilities. Although it's generally recommended that you dispose of an asset at the beginning of the next fiscal period, there may be options available to defer or reduce the potential tax liability on the sale of a significant capital asset.

New rules limiting multiplication of the small business deduction (SBD)

Effective for taxation years beginning after March 21, 2016, new rules have effectively put a stop to certain partnerships and corporate structures that multiply access to the SBD. Professionals providing services through a corporation have been especially impacted by these changes. If you have implemented a structure using one or more corporations and/or partnership to access the SBD, you should consult with your tax advisor to determine your best course of action going forward. This can include maintaining the existing structure, dissolving the structure or looking at alternative structures. The option that's right for you will depend on your particular situation.

Consider planning options where your business has significant eligible capital property (ECP).

Effective January 1, 2017, the existing eligible capital property (ECP) regime will be repealed and replaced with a new capital cost allowance (CCA) class for depreciable capital property. Some of the more common examples of ECP include goodwill, customer lists, trademarks, franchise rights, farm quotas and some patents (generally, intangible assets of a business).

Under the current rules, if the value of your CCPC is derived mainly from ECP (e.g., goodwill), and you have no immediate need for the sale proceeds, a significant tax deferral can be realized if the business is sold before the end of 2016.

However, under the new rules, the disposition of such property will be taxed as investment income, which is subject to an additional tax (that is not refunded to the corporation until taxable dividends are paid out to the shareholders). If your business has significant internally-generated goodwill, or accrued gains on other ECP, you should contact your tax advisor to discuss the planning alternatives. If the business cannot be sold before December, 31, 2016, one option would be to realize the accrued gain through an internal reorganization prior to the end of 2016.

Non-taxable gifts for employees— understand the rules.

If you want to give your employees a non-taxable holiday gift, the CRA's current position on what qualifies for tax-free status is as follows:

  • Non-cash gifts and non-cash awards to an arm's-length employee, regardless of number, will not be taxable to the extent that the total aggregate value of all non-cash gifts and awards to that employee is less than $500 annually. The total value in excess of $500 annually will be taxable.
  • In addition to the above, a separate non-cash long-service/anniversary award may also qualify for non-taxable status to the extent its total value is $500 or less. The value in excess of $500 will be taxable. To qualify, the anniversary award cannot be for less than five years of service, and it must be five years since the employee last received a long-service award.
  • Items of an immaterial or nominal value, such as coffee, tea, t-shirts with employer logos, mugs, plaques, trophies, etc., will not be considered a taxable benefit to employees and will not be included in the above $500 threshold.

Although such gifts/awards may not be taxable to your employees, the amount paid can still be deducted as a business expense. Note that gift cards are considered equivalent to cash and do not qualify for tax-free status under these rules. Performance-related rewards (for example, for meeting a sales target) and cash and near-cash awards (such as gift certificates) will continue to fall outside the administrative policy and will be taxable to the employee. Also, similar to the previous policy, all gifts and awards to non-arm's-length employees will be taxable.

Within this guide, you'll find that many of these tax-saving measures require implementation before the end of the year or early in 2017. After you've had a chance to review this guide, contact your Grant Thornton advisor to help you implement the measures that apply.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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