I understand all too well the obligations that accompany being the husband of my wife during the holiday season. In particular, there is a myriad of events that I'm obligated to attend. In my pocket I have two tickets to see Barry Manilow in concert (nothing against Barry Manilow, he's talented, but there are likely to be about three men there – me, and two other extremely unselfish guys).
What about you? Are you thinking about yourself this holiday season, or are you thinking about others? Let me invite you for a moment to think about yourself – and your business. There are some things you should consider before year-end that could save you tax dollars. Here are seven year-end tax strategies for business owners to consider:
1. Finalize the best salary and dividend mix. As we approach year-end consider whether you should pay yourself more salary or dividends before Dec. 31. Salary can give rise to RRSP contribution room for next year and tax deductions that could keep your corporation's taxable income below the federal $500,000 small-business deduction threshold. Dividends, on the other hand, may allow a recovery of refundable tax owing to your corporation. Making salary or dividend payments can enable the shares of your company to maintain the status of "qualified small business corporation shares," which is important if you hope to claim the $750,000 capital gains exemption on those shares in the future.
2. Pay salaries to family members. If your spouse or children provided services to your business in 2011, consider whether you've paid them a reasonable salary or wage for the work they've done. Paying compensation to family members in a lower tax bracket rather than distributing more dollars to you can save the family tax overall. You'll also be creating RRSP contribution room for those family members, and may make it possible for them to claim child care or other deduction or credits that might otherwise go to waste where an individual has no income against which to apply those deductions or credits.
3. Make tax-efficient withdrawals from your corporation. If you're thinking of extracting cash from your corporation before year-end, consider some of the most tax-efficient ways to do this, including: paying yourself eligible dividends, taking repayment of shareholder loans you've made to the company, paying yourself capital dividends (which are tax-free), or returning paid-up capital that you've put into the company.
4. Defer income to next year. Corporate tax rates are generally falling in 2012. The federal general tax rate is dropping from 16.5 to 15 per cent, general rates in Ontario will be declining on July 1, 2012, the small business tax rate will fall in New Brunswick and Nova Scotia on Jan. 1, 2012, and there may be a rate decrease in other provinces as well. So, consider pushing taxable income into the future by fully claiming discretionary deductions, such as capital cost allowance (CCA), in 2011.
5. Time the purchase and sale of assets. If you're considering the purchase of capital assets, consider buying them and putting them into use before your business year-end in order to claim a deduction for CCA sooner. On the other hand, if you're thinking of selling assets of your business and expect to realize taxable income in the process, consider deferring those dispositions until after your year-end. This will provide a CCA deduction for a longer period.
6. Structure shareholder loans properly. If you've lent money to your corporation, consider whether it might make sense to charge interest on those loans to create an interest deduction to your company. This can make sense if, for example, your corporation can use the deduction to keep taxable income below the $500,000 federal small-business deduction limit (the limit is lower in some provinces). Also, if you've borrowed from your corporation, consider repaying those loans since repayment before the end of the tax year following the tax year the loan was made can avoid a situation where the amount of the loan is potentially taxable to you.
7. Increase asset protection for the future. If your company owes you money, consider securing those loans by pledging assets of the company to guarantee those loans. This is a way to keep the hands of outside creditors away from your company's assets. Also, consider transferring assets such as real estate or intellectual property to a separate corporation to protect those assets from creditors of your business.
Tim Cestnick