Canada: Top 2017 Year-End Income-Tax Planning Tips From Canadian Tax Lawyers—Part 1: Reducing Taxable Business Income

Last Updated: December 11 2017
Article by David Rotfleisch

It's that time again. The year is almost done, and it's time to take advantage of business tax-planning strategies that will reduce your income-tax burden for the 2017 tax year. In Part 1 of this series, our Canadian tax lawyers provide their top tax-reduction strategies for taxpayers who earn business income.

1. Timing Your Expense Claims

Taxpayers earning business income should accelerate and incur their deductible expenses before the year end rather than realizing those expenses in 2018. Employees may write off depreciation on cars, planes, and musical instruments. Likewise, tradespersons and apprentices can deduct the cost of their tools—to a prescribed limit.

Similarly, individuals make their purchases now so that they may enjoy the benefit of the corresponding depreciation claim this year. Purchase your capital property before the tax year-end in order to claim CCA—at 50% of full rate—this year.

2. Claiming Your Allowable Business Investment Losses ("ABIL")

An allowable business investment loss is a loss on an investment on a small business's shares or debt. A taxpayer may deduct an ABIL from any source of taxable income. Standard capital losses, in contrast, are only deductible against capital gains.

In order to claim your allowable business investment losses this tax year, you must sell the investment shares or establish the investment debt as reasonably uncollectible.

3. Paying Out Bonuses to Enjoy the Small Business Deduction

A Canadian Controlled Private Corporation ("CCPC") enjoys a reduced income-tax rate on its first $500,000 of active business income. A bonus declaration is a key tax strategy for CCPCs with active business income exceeding $500,000. In particular, to the extent that its income exceeds $500,000, the corporation declares a bonus to its owner-manager.

This bonus must be paid and all payroll deductions remitted within 180 days of the company's year end. If the company fails to pay the bonus within this deadline, it cannot deduct the bonus in the year of declaration. This means that the corporation would fail to "bonus down" its income and thus incur tax at the general corporate rate on the amount exceeding the $500,000.

4. Paying Reasonable Salaries to Your Spouse or Family Members

A business owner may pay a reasonable salary to a spouse or family member working for the business. This effectively splits income and lowers the overall household tax rate, and it provides family members with RRSP contribution room.

A salary paid to a family-member employee must be reasonable given the tasks that the employee performs. In case of a future tax audit, the business owner must produce proper books and records. So, taxpayers must ensure strict compliance with the record-keeping requirements of Canada's Income Tax Act to avoid tax problems.

5. Give Your Employees Non-Taxable Gifts

A business owner may deduct business expenses of up to $500 annually for non-cash gifts given to each arm's length employee. But if you give your employee more than $500 worth of gifts in a year, the employee must include the excess in his or her income as a taxable benefit, and you must withhold CPP and income-tax on that amount. Moreover, the $500-annual allowance does not apply to cash gifts or performance-related awards.

Similarly, once every five years, an employer may deduct $500 for non-cash long service awards or anniversary awards given to each employee. The CRA requires the award to be for a minimum of 5 years' service and, you must wait at least 5 years before giving another award to the same employee.

6. Enhance Your Compensation Strategy

A compensation strategy includes a mix of salary, bonuses, and dividends. In particular, a bonus allows income—and thus the related tax liability—to be deferred until after the year end. A corporation can immediately deduct the amount of a declared bonus if it pays the bonus within the statutory deadline. Meanwhile, the recipient only needs to report the bonus when he or she actually receives it, which could be in the new year. So, if arranged properly, the bonus provides an accelerated deduction at the corporate level and a deferred inclusion at the personal level.

7. Repaying Shareholder Loans from Your Corporation

When you borrow funds from your own corporation, those funds are included in your taxable income if the loan remains outstanding for two corporate year-ends. So, you must ensure that you repay shareholder loans before this deadline.

8. Avoiding or Reducing Interest Charges on Tax Instalment Payments

If you make quarterly tax-instalment payments, you can avoid interest charges by making your final payment on or before December 15, 2017. Likewise, if you missed an earlier instalment-payment deadline, you can reduce interest by either increasing the amount of your final instalment payment or paying your final instalment earlier than the December 15th deadline.

9. Consider the Individual Pension Plan ("IPP")

Owner-employees of incorporated businesses can pursue an Individual Pension Plan or IPP as means of retirement saving. The IPP provides an opportunity for year-end corporate income-tax deductions for the corporation's contributions to the plan.

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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