Year-End Business Tax Strategies

Introduction

The end of the calendar year of 2012 is in sight and you should be starting to think about how you can maximize tax breaks to lower your business’s 2012 taxes.

The following is a list of tax-saving ideas to assist you in minimizing your income taxes payable.

Take Small Business Deduction

Determine whether your business can claim this tax break. The first $500,000 of active business income of a Canadian controlled private corporation (CCPC) receives preferential tax treatment on the federal level and in most provinces. The deduction is phased out on a straight-line basis when your business’s corporate taxable capital in Canada rises between $10 million and $15 million.

Your Chartered Accountant can help you determine if there are ways to trim taxable capital once it starts to rise above the $10 million mark.

Maximize RRSP Contributions

If you operate a sole proprietorship or partnership, your business income is all or part of your personal income. Your RRSP contribution is deducted directly from your income, so it has the potential to lower your tax rate. Maximize your contribution. For 2011, the maximum contribution is $22,450. You may be able to contribute even more if you didn’t use the entire deduction limit in previous years. Unused amounts can be carried forward. Forward the unused amount.

There is a slight catch:The most you can contribute is 18 per cent of earned income. If that amount is not high enough, you may not reach the maximum contribution.

Delay Invoicing

If your business is cash-based, you pay taxes only on income received. If you want to defer income to 2012, delay mailing invoices until the end of December. Alternatively, set up installment payment plans so that most revenue arrives in January or later. The dating of invoices can also be delayed, but discuss this with your Chartered Accountant.

Defer Capital Gains

If you own shares of a small business corporation and dispose of the shares, you can defer recognition of some or all of the capital gain if you reinvest the proceeds in another small business corporation. The proceeds must be reinvested during the year or within 120 days after year-end. Eligible investments are newly issued common shares in corporations whose assets do not exceed $50 million after investment.

Donate Shares

Private corporations that donate listed securities to a registered charity can add capital gain to their capital dividend account to be distributed tax-free to shareholders.

Purchasing Assets

If your business is on a calendar year, you may want to buy before the end of the year any new business equipment or office furniture that you planned to buy in 2012. Under the “half-year rule” you can deduct one-half of a full year’s tax depreciation, or capital cost allowance, this year even if you buy it and use it on December 31. Next year you can claim a full year’s depreciation.

While you are at it, purchase extra routine supplies in December if your company uses accrual accounting. It can deduct the items on its 2012 tax return, even if it does not pay for them until 2013. If you business uses cash basis accounting, it gets the deduction when it pays for the goods.

Postpone Disposing Assets

If you plan to sell off some assets and your business is on a calendar year, waiting until after 2012 will provide a larger CCA deduction for this year. Selling the assets before the end of the year would trim your company’s CCA claim for 2012. You may be able to recapture CCA if you have already claimed it. Postponing the disposition would defer the tax on the recaptured CCA.

Write Off Bad Debts

Accrual-based businesses can deduct bad debts in the year they become worthless. But they must demonstrate that the accounts cannot be collected. Act now to accelerate collection efforts and keep detailed records of collection calls, letters, and contacts.

Deduct Interest

Interest generally can be deducted on money borrowed to earn business or property income other than capital gains. There are rules aimed at denying deductions for losses that stem from interest and other expenses where a business cannot demonstrate a reasonable expectation pf profit.

Making Repairs

You may fully deduct the cost of repairs – but not the expense of improvements. Cash basis businesses get the write-off when the bill is paid; accrual based businesses get it when it is incurred.

Giving Gifts

Your enterprise can deduct as a business expense the cost of two non-cash gifts and two non-cash awards each year, as long as the total cost of the two gifts or the two awards doesn’t exceed $500, including taxes.

Contribute to a Political Party

You get a federal tax credit for political contributions. The amount of the credit depends on how much you give. For donations of as much as $400 the rate is 75 per cent. So if you donate $400, you get a credit of $300. For the portion between $750 and $1,275 the rate is 33 ? per cent.

So if you give $1,275, you will get a credit of $650 ($300 + $175+$175). Some provinces provide similar credits. Federal and provincial credits cannot be carried forward.

Build A Child-Care Centre

There is a non-refundable investment tax credit if your business sets up a licensed childcare centre for the employees. The credit is 25 per cent of eligible expenses such as fixed assets and start-up costs, to a maximum of $10,000 for each care centre. Credits may be carried back three years and forward 20 years.

There may be additional tax breaks available from your province or territory and your accountant may be able to find even more ways to minimize the 2011 taxes your business will pay.

Tax Wise Compensation

If you own a Canadian controlled private corporation (CCPC), work out the most effective ways to pay compensation to yourself, relative you employ and shareholders. You can take a straight salary or pay bonuses – or combine them. As well you can pay dividends that may be subject to a lower tax rate. Consult with your accountant about these forms of compensation, each of which presents its own tax advantages:

  1. Salaries provide contribution room for your RRSP. You can also split income and lower taxes by paying a reasonable salary to your spouse or common-law partner and to your children who work for the business. The money is taxed at the rates of the lower-earning individuals.
  2. Bonuses can be paid next year to yourself and relatives working for the business. This defers taxes, if your company reports taxes on an accrual basis. Bonuses can also be used to reduce your enterprise’s income so that it qualifies for the small business deduction.
  3. Dividends paid to shareholders may qualify as “eligible dividends” that are subject to a lower tax rate. The payouts must come from the corporation’s general rate income pool at the end of the year in which the money is paid.

Conclusion

If you have any questions with respect to the above or any other income tax matters, please contact Joe Truscott, Chartered Accountant at 905-528-0234, or email Joe at joetruscott@josephtruscott.com.

September 2012