Apple just recently revealed 2017’s most popular apps, music, movies. This reminds me to write down some popular tips for business owners before the New Year-2018 kicks in.
Here they are:
Review the business structure and make sure it fits
Why the review of the business structure is on the 1st tip? Because it helps you identify opportunities/issues/potential risks so that you can be well prepared for. If you just started the business in 2017, you may still operate as a sole proprietorship or partnership. What that means for your tax reporting is that you still can enjoy business losses against your other income if that is still the case.
As for an incorporated business, you can also enjoy the favorable tax rate as low as 15% due to a CCPC status. But check with the accountant to make sure if the corporation is still eligible to claim the small business deduction as a CCPC. One case was recently reported in Financial Post. It was about a tax payer owing 11 rental properties inside the CCPC. The corporation’s CCPC status has been challenged by The Canada Revenue Agency, who later denied the deductions. And the CRA deemed the business as a “specified investment business” due to the fact that less than 5 full-time employees hired throughout the year. What it means, the rental business has to pay high marginal rate same as other investment income. Some other cases that I heard that the rental business hired all direct families as employees. Is it OK? I am not sure if this will stand firm if the CRA comes and asks the questions.
For those owners seeing the signs of profitability, now it is time to think what the optimal business structure is suitable the growing business. I have written a blog about the factors to be considered when setting up a new structure. Please check here.
For those matured business, it is time to consider an exit strategy: whether the business is put up for sale or passed to the second generation.When the year comes to an end, it is always a good opportunity to review those strategic question so that the business gets a fresh start and has its clear goal.
Employed or self-employed or Personal Services Business (“PSB”)
Sometime, even though you think your business is incorporated, you may be deemed to be “PSB” by the CRA. This happens to a lot of IT contractors and engineers these days. Generally, the person is the only director and shareholder in the corporation and service only one large client. If deemed to be a PSB, the business will be limited to deduct all the expenses incurred and subject to 33% federal tax instead of 10.5%.
Shareholder account :credit balance
If you owe to your company, your shareholder account will have a debit balance. This is one of the areas that the CRA is paying attention to. This is simply due to shareholder withdrawing funds without withholding tax, which the CRA is supposed to collect. If there is a debit balance, you may need to pay back before the year end and deposit it to the bank account. Otherwise, the amount must be included in your personal income. Unexpected tax circumstance may occur if this is detected by the CRA auditors.
How much pay to the shareholder
How much profit made in the business? If your business has a December year-end, you may need to estimate the level of corporate taxable income at year-end. If necessary, make installment to avoid penalty and interest. If it suggests paying bonus to reduce/eliminate taxable income, how much should be paid out to maximize out tax benefit meanwhile personal tax has to be considered in the equation. In some cases, shareholder’s personal needs are not that critical. In this situation, it may be wise to pay the corporate taxes rather than pay or defer the additional remuneration required to reduce the corporate tax to zero.
Lastly, you may need to discuss with your accountant if a bonus/dividend is better solution. Given that the Federal plans to lower the small business tax rate in 2018 and 2019, that indicates the dividend tax rate will rise, it is better to pay out dividend in lower tax rate assuming the corporation has sufficient retained earnings.
How much pay to family members who provide service
If you followed the Federal tax proposal in the fall, you probably know a bit about the proposed rules in – tax on split income (TOSI). One of the aspects of TOSI is to target on the money paid to family members. However, if family members did provide the service, their remuneration should not be overlooked given that the service are being documented properly and the remuneration is reasonable as compared to market price.
SR&ED is not new
Scientific research and experimental development (SR&ED) tax credits are not new. Businesses involved in the manufacturing/high-tech industries might be entitled to SR&ED tax credits available federally, and also in some provinces. A lot of start-ups leverage this as another source of financing. The business can receive up to 35% on eligible expenses. Don’t miss out if your business is eligible. On a side note, individuals are also eligible for a refundable ITC at the basic rate of 15%on qualified SR&ED expenditures. The ITC must be applied against tax payable and the remaining ITC can be refunded, up to a maximum of 40%.
Make sure your bookkeeping is up-to-date
Having a clear view of the business’ financial health is to make things a lot easier for both of you and your accountant. The good bookkeeping will help to maintain updated transactions so that you know whether the business is really making money and your accountant can help plan the tax faster. Another thing is that it will be very handy when all the documents/transactions are organized. When the CRA requests, you always have evidence ready.
Purchase business assets before the year-end
The business is allowed to take tax deduction on the assets purchased during the year. If assets are purchased in last month of the year, the business can still take advantage of 6 months of tax deduction (aka capital cost allowance). Also, if you are involved in business acquisition, don’t wait until the New Year to close the deal. The reason is similar as it can claim a tax deduction for its current tax year for the business purchases made.
Enjoy the break and spend a bit time in planning. Happy holidays!
Recent Comments