Business owners are facing all types of challenges today – including the pending tax changes that Finance Minister Bill Morneau has announced, and is in the process of finalizing.
Given the proposed changes, and the fact that Dec. 31 is approaching, here is a list of tips to consider before the year's end that could make life less taxing if you're a business owner.
Pay dividends to family members.
The Liberals have said that they will move forward with proposals to curtail the payment of dividends to family members who are not working in, providing capital to or assuming risks related to the business. These changes are to be effective Jan. 1, 2018. Consider taking advantage of the current rules by paying additional dividends to family members in 2017.
Consider a reorganization.
It may make sense to provide a different class of shares to different family members so that, going forward, you can pay dividends on certain classes of shares (to certain individuals) and not others. This way, you have more control over how you distribute dividend income to others, allowing you to avoid any punitive tax that might apply to dividends received by children under the age of 25, or might otherwise be caught by the expected new rules.
Defer payment of capital dividends.
If your company has a balance in its capital-dividend account, it's possible to pay tax-free capital dividends to any shareholders. These capital dividends will be especially helpful next year (or later) if it becomes problematic to pay regular dividends to family members given the expected tax changes. Paying them capital dividends will side-step higher taxes resulting from the tax changes.
Push taxable income into 2018.
Since tax rates on small businesses eligible for the small-business deduction will be dropping to 10 per cent federally on Jan. 1, 2018 (announced by Mr. Morneau on Oct. 16), it makes sense to push taxable income into your 2018 fiscal year if possible. How? By accelerating deductions and claiming them in 2017 instead, if possible, or deferring certain work until 2018. You can accelerate deductions by, for example, paying for certain supplies or costs today, or purchasing depreciable assets and making them available for use by year-end.
Revisit your salary-dividend mix.
You still have time before the end of the year to determine your optimal mix of compensation between salary and dividends. Things to consider are your personal marginal tax rate, the tax rate of your company, payroll and health taxes, your desire (or not) to contribute to the Canada Pension Plan and whether you want to create RRSP contribution room (a salary of $145,722 in 2017 will provide the maximum registered retirement savings plan contribution allowed in 2018 of $26,230).
Repay shareholder loans.
If you've borrowed money from your corporation, it's generally taxable in your hands (with some exceptions) unless you repay the loan by the end of the year following the year you borrow the money. So, consider whether repaying loans before year-end is necessary. On the other hand, if you've lent money to your corporation, you might want to take repayment of all or some of that amount. This will do two things: (1) provide you with tax-free cash-flow from your business, and (2) potentially reduce the passive income you're earning in your company which could, under the proposed tax changes, give rise to higher taxes depending on the amount of that passive income. Speak to a tax pro for more. You may even want to consider charging interest on loans you've made to your company, which can create a deduction for the corporation and provide you with interest income that, unlike a salary, isn't subject to withholding taxes.
Improve cash flow in the short term.
Cash flow for your business is critical. Consider improving cash in the bank by reducing your tax instalments if you expect business income to be lower next year, or recovering any income, sales, customs or other tax overpayments from prior years.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.