Annual Year-End Planning for 2020

Please see some of our other tax planning blogs posted earlier this year:

Tax Planning Ideas During These Challenging Times

Whether we may see some tax changes introduced later this fall:

This includes whether the federal Liberal government will change how capital gains are taxed and whether it makes sense to trigger those gains sooner* given their comments in the September 23, 2020 Speech from the Throne that included:

In the longer term, the Government will focus on targeted investments to strengthen the middle class, build resiliency, and generate growth. The Government will also identify additional ways to tax extreme wealth inequality, including by concluding work to limit the stock option deduction for wealthy individuals at large, established corporations, and addressing corporate tax avoidance by digital giants.

* Please contact us if you have questions on how and why to trigger gains.

See an earlier blog: Potential Changes to the Capital Gains Rate

Contact your DMCL advisor to discuss the impact of these rules on your business.

Tax Rate Summary

There are no announced corporate tax rate changes from 2020 to 2021 pending any changes the new Federal Finance Minister Chrystia Freeland may announce later this fall in an economic update.

Corporate Tax Rates (Fed + BC)	*2020*	*2021*
CCPC Active Business Income < $500,000[1]	11.00%	11.00%
CCPC Active Business Income > $500,000	27.00%	27.00%
CCPC Investment Income	50.67%	50.67%
Personal Services Business Income	45.00%	45.00%

British Columbia’s Feb 18, 2020 provincial budget introduced a new top tax bracket for the 2020 tax year. Income in excess of $220,000 is subject to provincial tax at a rate of 20.5%. In 2019, the top tax bracket was 16.8% on income in excess of $153,900.

Personal Tax Rates (Fed + BC)	*2020*	*2021*
Regular Income	53.50%	53.50%
Capital Gains	26.75%	26.75%
Eligible Dividends	36.54%	36.54%
Non-Eligible Dividends	48.89%	48.89%

See our 2020 tax rate card for the tax rate at different tax brackets.

Compensation Strategy – Dividends Vs. Salary/Bonus

There are a number of things to consider when determining whether to pay salary/bonus, dividends or both to the owner-manager.

Purifying the company of non-active assets – See “Maintaining QSBC Status” and “Passive Investment Income” below
Tax Integration – What will the total tax burden, both corporate and personal, be on salaries versus dividends? For active business income < $500,000, there is a small tax cost (~ 1%) to receiving dividends instead of salary. For investment income, there is generally a 5 – 6% tax cost to receiving dividends rather than a salary.
RRSP Contribution Room – Does the owner-manager need salary to generate RRSP contribution room?
CPP Premiums – Both the employer and the employee portion of CPP premiums (up to ~$5,800) will apply to salary paid to the owner-manager.
BC Employer Health Tax – BC Health Tax premiums apply to salary, wages and bonuses paid by an employer to an employee[2]. Employers with B.C. payroll of less than $500,000 will not be subject to the tax. Payments of salary to an owner manager could be subject to the tax, or could trigger the tax if payroll is otherwise less than $500,000.
Dividend Refund – Paying a dividend may allow the corporation to recover previously paid refundable tax on investment income. A shareholder with no other income can also receive a regular dividend of up to $23,000 tax free ($53,000 if an eligible dividend).
Tax on Split Income (“TOSI”) – TOSI (a tax at the top rate and not at the family member’s lower rate) may apply to dividend or interest income but not salary paid to a family member for their services.

Maintaining QSBC Status

When shares of a “qualifying small business corporation” (“QSBC”) are sold, the shareholder may be able to claim a capital gains exemption of up to $883,384 (2020) against the gain realized. Accumulating too many non-active assets in the company at any time in the 24 months preceding a sale could prevent the shares from qualifying. Consider “purifying” the company by paying down debts, acquiring business assets, or paying a bonus or dividend to the owner-manager.

Purification may be especially important where your company has undergone a reorganization which introduced a family trust or family members as shareholders. Often it is necessary for such a company to maintain “small business corporation” status at all times subsequent to the reorganization to avoid the corporate attribution rules. To have this status, the fair market value of the company’s non-active assets must be less than 10% of the fair market value of the company’s total assets. Thus, periodic purification of non-active assets may be required. Watch if paying a dividend to a trust that is selling its shares in the same year so that unplanned 38 1/3% Part IV tax is not tripped.

Passive Investment Income

If a Canadian-Controlled Private Corporation’s (“CCPC’s”) investment income exceeds $50,000 annually, its ability to access to the small business deduction will be limited. The CCPC’s $500,000 “business limit” will be reduced by $5 for every $1 of investment income, and thus will be $0 when investment income exceeds $150,000. Active business income in excess of the reduced business limit will be taxed at the general rate (27%) instead of at the small business rate (11%). Consider “purifying” the company by paying down debts, acquiring business assets, or paying a bonus or dividend to the owner-manager.

Accrued Bonuses

A bonus accrued in a particular taxation year is generally deductible if it is paid within 179 days of the end of the corporation’s tax year. However, the bonus isn’t included in the owner-manager’s income until it is actually received. Consider accruing a bonus to reduce the corporation’s tax, and withholding payment up to 179 days to defer payment of the personal tax on the bonus.

Shareholder Draws

Where an owner-manager (or a related person) borrows money from their company in a particular taxation year of the company, and the debt is not repaid within 365 days from the end of that taxation year, the amount of the debt is included in the borrower’s income for tax purposes. Consider whether there are any shareholder draws that should be repaid. Note that if the draws are repaid, and subsequently re-borrowed, the income inclusion could still apply.

It is important to document all such borrowings as loans, and to document the repayment of the loans. The Canada Revenue Agency is quite aggressive in treating shareholder draws as “appropriations” instead of as loans. Like shareholder loans, shareholder appropriations are included in the shareholder’s income, but there is no exception where the “appropriation” is repaid within the time period mentioned above.

Corporate Income Tax Installments

Income tax installment requirements for the current year are based on the taxable income of the preceding year. If taxable income for the current year will be less than the prior year, it may be possible to reduce the installment payments or to eliminate future installment payments. Evaluate projected taxable income later in the taxation year to see if this is the case.

If required installments are paid late, non-deductible interest and penalty charges will apply (COVID-19 relief was just for March 18 to September 30 2020 required instalments). However, if future installments are paid early, the amount of the non-deductible interest charges can be reduced. Consider prepaying future installments.

Asset Purchases and Sales

Capital cost allowance can be claimed on fixed assets that are available for use in the taxation year. Consider accelerating planned asset purchases so capital cost allowance can be claimed in the current year’s tax return.

Certain types of property may be eligible for accelerated capital cost allowance claims. See here.

Also consider the incentives introduced in the 2019 Federal Budget for zero-emission vehicles. See here.

See BC PST relief for certain assets purchased from September 17 2020 to September 30, 2021 here.

[1] Assuming < $50,000 of investment income

[2] Came into effect January 1, 2019. Levied on payroll up to $1.5M, 2.925% x (Payroll – $500,000). On payroll > $1.5M, 1.95% x Payroll.

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