Canada: Chapter 3: Professionals And Business Owners

Our annual Tax Tips Guide is here to assist you in your tax planning, presenting some quick ideas and strategies for you to employ.

If you have your own corporation

Consider your optimum salary/ dividend mix to achieve less overall tax:

Salary will qualify you and other family members active in the business for RRSP contributions, Canada Pension Plan (CPP) contributions, and child-care deductions. Dividends will not qualify an individual for these contributions or deductions.

In the past, the payment of dividends to shareholders over 17 years of age was an easy way to achieve income splitting, costing the family unit less in current taxes. With the introduction of TOSI (Tax on Split Income), income splitting has become significantly more difficult. The TOSI eliminates the tax benefits of paying dividends to family members (with little or no other sources of income), who are not active in the business or who do not own "excluded shares" of the company. If TOSI applies to the dividends, the recipient individual will pay tax on these dividends at the highest marginal tax rate. Speak to your Crowe Soberman advisor to determine whether you may still benefit from income splitting given your specific circumstances.

Consider accessing funds from the corporation that can be withdrawn tax-free. For example, repay shareholder loans, return capital to shareholders up to the lesser of the paid-up capital and the adjusted cost base of the shares, or roll in personal assets with a high cost base to the corporation on a tax-free basis to extract the cost base of the assets on a tax-free basis.

Defer income that is not required personally for longer period:

If you do not require cash from your corporation to spend personally, consider keeping the funds invested in your corporation and defer the tax payable on the ultimate withdrawal of the funds.

Consider instalments for 2020:

The threshold above which corporations must pay income tax, GST and source deductions instalments is $3,000. The threshold will be based on 2019 tax amounts payable.

Certain Canadian-controlled private corporations are allowed to make quarterly, instead of monthly, income tax instalments. To qualify, certain conditions must be met, including the following criteria relating to the 2019 taxation year:

  • The corporation has been in perfect compliance in the previous 12 months;
  • The corporation was entitled to the small business deduction;
  • The taxable income of the associated group did not exceed $500,000; and
  • The taxable capital of the associated group did not exceed $10 million.

Instalment planning for 2020 can be addressed during 2019 by meeting the conditions where applicable.

Did you know?

On November 6, 2019 the Ontario government, announced a reduction to the small business deduction rate effective January 1, 2020. The rate decreased from 3.5 percent to 3.2 percent. The federal government has maintained the small business rate at 9 per cent. These rate reductions result in a larger deferral of after- tax business profits in the corporation that can be reinvested in the business. The combined (federal and Ontario) small business rate will be as follows:

  • 2018 - 13.5%
  • 2019 - 12.5%
  • 2020 - 12.2%

Interest deductibility

Where possible, maximize interest deductions by structuring or arranging your borrowings to be incurred, first for business or investment purposes, and then, for personal use.

Where certain business or capital property (e.g., shares, but not real estate or depreciable property) is lost or ceases to earn income, the interest incurred on the related borrowing may in some cases continue to be deductible.

Did you know?

Effective for taxation years beginning in 2019, corporations must now track Refundable Dividend Tax on Hand into two separate pools, being Eligible Refundable Dividend Tax on Hand ("ERDTOH") and Non-Eligible Refundable Dividend Tax on Hand ("NERDTOH"). As such, corporations will obtain a dividend refund on the payment of eligible dividends (which are subject to lower dividend tax rates in the hands of shareholders) only to the extent they have an ERDTOH pool.

If you are self-employed

If you have a home office and you meet certain conditions, you can deduct eligible home office expenses, including a portion of your mortgage interest, home insurance, property taxes, utilities and minor repairs.

Consider the potential benefits of incorporating your business.

Did you know?

Private corporations (or associated corporations in a corporate group) that earn passive investment income will have a reduction in their $500,000 small business deduction threshold limit. The $500,000 limit will be reduced once the passive investment income earned in the associated group exceeds $50,000, with full elimination once investment income exceeds $150,000.

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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