Year End Checklist - 2020 (Business Owners)
What a year to be in business - from the various loans, subsidies and grants - to the constant unpredictabilty of government shut downs, reopenings and the constantly changing and hard to predict customer needs. As 2020 rolls out here are some tips to consider.
1. Determine the optimal mix of salary and dividends for the owner-manager and other family members for 2020, considering factors such as the owner/manager’s marginal tax rate, the owner/manager’s cash flow needs, the corporation’s tax rate, provincial health and/or payroll taxes, RRSP contribution room, CPP contributions and other deductions and credits (e.g., child care expenses, donations, etc.). If the cash is not needed, consider retaining income in the corporation.
2. Pay a reasonable salary before year-end to any family members who provide services to the business. This constitutes earned income, which increases RRSP contribution room for 2021, and provides a tax deduction to the business in 2020. Any salary paid must be reasonable based on the services performed in order to be deductible to the business. Keep records of the family members’ time spent and services performed.
3. Monitor the corporation’s passive investment income and consider planning to reduce passive investment income before year-end, if needed. For 2018 and later taxation years, CCPCs with “adjusted aggregate investment income” (AAII) above $50,000 (on an associated group basis) will be subject to a reduction in the amount of small business deduction that can be claimed (AAII generally includes interest, rent, royalties, portfolio dividends, dividends from foreign corporations that are not FAs, and taxable capital gains from the disposition of passive investments).
4. Consider accelerating the purchase of depreciable assets (e.g., new business equipment, office furniture, etc.) before year-end. The accelerated investment incentive allows for an increased first-year CCA deduction for most depreciable assets acquired after November 20, 2018 and available for use before 2028. Consider delaying the sale of depreciable assets that will be subject to recaptured depreciation until after year-end.
5. Review inter-company charges to ensure charges are reasonable, and consider any adjustments to reduce the overall taxes of a related group.
6. Ensure that shareholder loans are repaid by the end of the corporation’s taxation year following the taxation year in which the loan was received.
7. Consider setting up an Individual Pension Plan (IPP) as a method of saving for retirement where an owner-manager earns significant T4 income and is at least 40 years of age. An IPP can provide both year-end corporate income tax deductions and a structured retirement savings plan for an owner-manager (and certain family members who are employees). Also consider that the new passive investment income rules do not apply to investment income earned in an IPP.
8. Pay final corporate income tax balances (or an estimate if a final number is not known) within two months (three months for certain CCPCs) after year-end to avoid interest charges.
9. Ensure that claims for SR&ED expenditures or ITCs are filed by 18 months after the corporation’s year end. Consider whether any COVID-19 payment extensions are available to the company.
10. Business owners may want to consider succession planning techniques, such as an estate freeze to minimize tax on death and/or probate fees. An estate freeze is used to reduce taxes on death and involves the transfer of the future growth of a business to family members.While values are down on businesses due to COVID-19, it may be an ideal time to freeze the value of the shares.
11. If you are thinking of selling your business, ensure that the business continues to qualify as a small business corporation, shares of which are eligible for the lifetime capital gains exemption. Consider crystallizing the lifetime capital gains exemption and/or restructuring to multiply access to the exemption with other family members.
Note - Thank you to Thomson Reuters for support in this post.