Doing both tax planning and tax dispute resolution for small and medium sized corporations I have had the opportunity to see clients through all stages of their interactions with the Canadian Revenue Agency ("CRA"). In many cases clients are stuck with significant tax consequences based on decisions made in previous years.
Below are my top tips for limiting the amount corporations or their shareholders pay the CRA.
- Make sure your current
corporate structure reflects current tax law.
This tip isn't just about limiting how much you pay the CRA, but also how much you pay in professional fees.
In the last few years, the rules related to how corporations are taxed have changed substantially. Notable changes include changes to the small business deduction, the refundable dividend tax, and the introduction of the tax on split income.
All these changes served to reduce or eliminate so called "tax loopholes" available to corporations. However, many corporate structures still in place were set up mainly to take advantage of those "loopholes".
Because many of these structures were complicated and involved using additional corporations, you may be paying additional administrative costs associated with maintaining that structure. Further, your current structure may not be taking advantage of strategies to limit your taxes under current tax law.
- Plan for the capital gains
One of the main strategies to limit your tax under current tax law is the capital gains deduction. There are not many great deals in the Income Tax Act, but this is one of them. The capital gains deduction is available to offset gains on qualified small business corporation shares and/or qualified farm or fishing property. When a sold asset qualifies, the capital gains deduction can allow a taxpayer to reduce their taxes by over $200,000.
There are very specific conditions required to qualify for this deduction, and some of those conditions need to have been in place for at least two years. This means that if you are not set up so you constantly qualify for those two year conditions, when you do have the opportunity to sell your business, you may not be in a positon to take advantage of the exemption.
Having the proper corporate structure and plan in place can ensure that, if you do sell your business, you will be able to qualify.
- Get tax advice before major
Any time there is a significant transaction there will probably be tax consequences. This is even if money is not being exchanged. Tax law is also very technical. It is never pleasant to discover after the fact you could have saved a lot of taxes with some planning.
A perfect example is the capital gains deduction. Certain requirements only need to be met immediately before the disposition. This means that, with some tax planning immediately before the sale of your corporation, in many circumstances a vendor can take advantage of the capital gains deduction. But if this planning is not done, the capital gains exemption might be unavailable.
This is just one example. Many major transactions will have tax consequences. It is significantly better to address these consequences ahead of time, rather than simply being stuck with the consequences afterwards.
- Have an estate plan, and make
sure your executors know to get tax advices as soon as
The biggest transaction of most peoples' life is when they dispose of everything they own when they die. Just like any other big transaction, planning, or lack thereof, can have a huge positive, or negative, impact on the potential tax liability (not to mention on your heirs and successors).
Shares of a corporation especially need proper tax planning in order to eliminate unwanted tax consequences.
Further, there are many tax planning opportunities that are only available for a limited period of time after you die. Some of these are available for three years, but the loss carryback to the final return – which can be especially important for shares of a corporation – is only available for one year.
A lot of tax can therefore be saved by not only having a will, but also by having executors that are informed that there could be significant tax considerations that may need to be promptly addressed after your death.
- File proper returns and keep
Finally, my last, but not least, tip is to preemptively prepare for an audit. This means, first, always file your tax returns. This includes years where you operate at a loss or have no income. If you don't file you can't claim the losses and, perhaps more importantly, the CRA may issue you an arbitrary assessment.
Second, keep good records. In Canada, the onus is on the tax payer to show what taxes they owe. In practice, this means the CRA can assume whatever it wants and it is up to taxpayers to prove them wrong. It is extremely difficult to disprove a CRA assumption without documents supporting your position (and if it can be done, it usually involves appealing to the Tax Court).
Good records don't just mean keeping receipts – it means organizing them and writing on them what they are for. You probably won't remember three years later when the CRA conducts the audit.
Good records also don't just mean corporate records. Most CRA audits of closely held private corporations now include net worth assessments which means your whole household's personal finances will be under scrutiny. I therefore recommend that, if you are the shareholder of a closely held private corporation, you should keep good records of your personal finances as well as the corporation's.
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.