2021 Owner-Managed Enterprise Tax Tips and Year-End Planning

Tax Rate Summary

Corporate tax rates and personal tax rates are stable in BC from 2021 to 2022:

Year-End Planning

December 31 is fast approaching. If you haven’t already began to think about your tax planning strategies, there’s still time to take advantage of the opportunities before the year-end.

Compensation Strategy

• Factors impacting the mix of salary and dividends paid to the owner-manager include:
  • The owner-manager’s cash flow needs
  • Corporate and personal tax rates
  • The integration cost or benefit of earning income thru a corporation
  • Payroll taxes on salary and wages such as CPP, EI, BC health tax, etc.
  • The owner-manager’s need to create RRSP contribution room
  • Whether the corporation is entitled to a dividend refund on payment of a dividend
• A bonus to the owner-manager declared before the end of the corporation’s tax year can be deducted in that year as long as it is paid to the owner-manager within 179 days of the end of the tax year

Paying Dividends

• Paying an eligible dividend may generate a dividend refund for the corporation if it has a balance in its ERDTOH account
• Paying a non-eligible dividend may generate a dividend refund for the corporation if it has a balance in its NERDTOH account
• Designate dividends as eligible to the extent of the balance in the corporation’s GRIP account balance at the end of the corporation’s tax year
• Pay tax-free capital dividends if the corporation realized a net capital gain during the year, or otherwise has a balance in its capital dividend account

Purification (to help the company shares qualify for the enhanced capital gains exemption)

• Holding passive assets in a corporation is often undesirable for a number of tax related reasons:
  • Earning investment income inside a corporation results in a greater total tax burden than earning investment income personally
  • Passive income greater than $50,000 earned by a corporation will limit the corporation’s ability to claim the small business deduction
  • Passive income greater than $150,000 earned by a corporation will prevent the corporation from claiming the small business deduction
  • So that the owner-manager can claim the $892,218 (2021) capital gains exemption on a sale of the corporation’s shares, greater than 50% of the corporation’s assets must be active assets
  • To avoid the application of the corporate attribution rules after certain reorganizations, greater than 90% of the corporation’s assets must be active assets
• Options for purifying the corporation of passive assets include using the passive assets to:
  • Repay shareholder loans
  • Pay tax-free capital dividends
  • Pay taxable dividends (eligible first, then non-eligible)
  • Pay a bonus to the owner manager
  • Pay down corporate debt
  • Acquire assets for the active business

Loans to/from the corporation

• Loans received from the corporation in a particular tax year must be repaid within 365 days of the end of that tax year to avoid an income inclusion to the loan recipient
• To avoid an income inclusion for the owner-manager, it is critical to maintain proper documentation for all loans made to the corporation and for all loans received from the corporation to avoid an income inclusion, and to ensure that the corporation’s accounting records accurately record the loan related transactions
• Proper documentation includes a loan agreement, written acknowledgements of funds advanced and of funds repaid under the particular loan agreement, a schedule to the loan agreement showing the date and amount of all funds advanced and funds repaid under the particular loan agreement, and copies of all related bank documentation such as bank statements, cancelled cheques, wire/electronic transfers, etc.

Timing Considerations

• Defer selling assets / realizing gains until after the end of the tax year where possible
• Make purchases of depreciable assets and ensure that they are available for use before the end of the tax year so the corporation can claim capital cost allowance
  • Canadian-Controlled Private Corporations may be eligible for immediate expensing of the cost of certain classes of depreciable assets
  • The Accelerated Investment Incentive enhances the capital cost allowance that may be claimed by any type of corporation on most classes of depreciable property
  • Full expensing of the cost of Class 53 manufacturing and processing machinery and equipment may be claimed by any type of corporation
  • BC sales tax rebate

Tax Installments / Balances Owing

• Compare the corporation’s projected tax payable for the tax year to the installment payments already remitted for the year and consider whether further installment payments are necessary
• A corporation’s unpaid tax balance for a taxation year is due:
  • CCPC’s – 3 months after the end of the tax year
  • All other corporations – 2 months after the end of the tax year

Income Splitting

• Consider having the corporation pay reasonable salaries/wages to family members in lower tax brackets for work performed for the corporation
• Consider having the corporation pay dividends to family members who own shares of the corporation and are in lower tax brackets. Review the “tax on split income” rules before doing this
• Consider having the corporation pay dividends to a family trust that owns shares of the corporation and having the family trust allocate those dividends to family members in lower tax brackets. Review the “tax on split income” rules before doing this
• Consider making a prescribed rate loan to a family member before the prescribed rate increases from its historical low of 1%

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