The end of the year provides a great opportunity for business owners to consider ways to improve their tax position. As a business owner, there’s still time to manage taxes for yourself and your business for 2017 before the end of the year. It is particularly important this year that you consider year-end tax planning keeping in mind the government’s private company tax proposal which may result in increased taxes in 2018 for private companies and their shareholders.
New tax rules for private companies are on their way
While you carry out your review this year, keep in mind that in 2018 the way private companies and their shareholders are taxed will be changing. In the summer of 2017, Finance Minister Bill Morneau released a number of tax proposals for small businesses, which have since been updated in October 2017. The updated reforms include changes to the “reasonable test” for income splitting/sprinkling and passive investments inside of a private corporation,
As a business owner, you should be aware of how these changes will affect your company and your financial situation. Please set up a meeting with us and your tax advisor before the end of the year to review how these changes will affect your situation.
Effective Dividend/Salary Mix
You can receive corporate income as salary or dividends as the owner of an incorporated business. Deciding on what’s best for you this year, you must analyze the optimal mix of salary and dividends for you, which depends on several factors including:
You may want to pay yourself enough salary to contribute as much as you possibly can towards an RRSP. The same goes for any family member employed by you. The maximum contribution you can make is 18% of the previous year’s earned income, up to a limit of $26,010 for 2017 and $26,230 for 2018. Keep in mind that the salary paid must be reasonable for your company to get a tax deduction.
The downside to this, is that if your business is in a situation where you can suffer from economic downturn, then paying out a big salary in a profitable year will reduce the likelihood of recovering corporate taxes paid, if a loss materializes.
Family employment – Paying a salary to your family
You may want to consider employing your family members and paying them an appropriate salary if they provide services to your incorporated business. The business will benefit from a tax deduction on the salary paid, as long as it is reasonable in light of the services they provide (Example: administrative work, bookkeeping, acting director). Usually, a salary is considered “reasonable” if the services are genuinely being provided and the salary is similar to arms’ length comparables. Remember to weigh in the costs of payroll taxes and CPP contributions against the potential tax savings.
Family members who hold shares in your company
Consider paying additional dividends in 2017 to your family members who hold shares in your company, before the new tax on split income regime comes into effect in 2018. If the dividends amount these individuals receive is “unreasonable” under the circumstances, they will be taxed at the top marginal tax rate (regardless of their own personal tax rate).
The new proposed rules are targeted at family members aged 18-24. The “reasonableness test” examines labour and capital contributions to the business, risk assumed and previous remuneration.
You should review your tax situation with your tax advisor including your family company’s organizational structure on a go-forward basis to ensure you satisfy the new “reasonableness test”.
Does the small business deduction affect you?
Can your business claim a small business deduction? The current small business deduction is $500,000. The small business tax deduction will be worth more to your company this year than it will be in 2018, because the small business tax rate will be decreasing from 10.5% in 2017 to 10% in 2018 and will be down to 9% in 2019.
If your corporate group claimed more than one small business deduction, the 2016 federal budget introduced several changes which were intended to limit the multiplication of the small business deduction through the use of certain partnerships and corporations. Please review this with your tax advisor.
When to pay dividends: 2017 or 2018?
Deciding if to pay dividends in 2017 or 2018, consider that the income tax rate for non-eligible dividends (generally, dividends that are paid from a company’s income that were taxed at the small business tax rate or as interest income) is increasing slightly in 2018. The federal tax rate is going up 0.34% from 26.30% in 2017 to 26.64% in 2018. A non-eligible dividend of, say, $100,000 out of your company in 2018 can save you at least $340 in absolute tax savings if paid in 2017 instead. These savings can be even higher if the provinces also announce increases to their 2018 tax rates for non-eligible dividends. The following provinces have announced increases: Ontario, New Brunswick and British Columbia.
Please also note that the top personal rate is also increasing.
Are you affected by the new passive income tax regime?
The rules being introduced by the government in 2018 can potentially eliminate the financial advantages of investing passively through a private corporation. As a result of these rules, it will soon become less beneficial to earn investment income in a company and distribute non-eligible dividends, than it will be to earn investment income personally. More details are expected to be announced in the Federal Budget 2018. The government made an announcement on October 18, 2017, that passive investment income below a $50,000 annual would face no tax increase and confirmed that the new rules would apply on a “go-forward basis”. According to the government this $50,000 threshold is intended to allow you to build up passive investments to help cover things like income fluctuations, start-up costs or maternity leave. The government has also stated that passive investments that have already been made by private corporations’ owners will be “protected” (this includes future income earned from these investments). There is still clarification required on when these rules will take effect and how the government intends to implement these new rules.
This is in an imperative year to do a year-end review of your personal and business finances. Talk to us, we can help.
Calculating and figuring out how much tax you have to pay is nobody’s favorite time of the year, but if you plan carefully there are many tactics available at your disposal to make sure that your tax bill is not more than it has to be in 2017. Which tactics make the most sense can be figured out by analyzing your current finances, estimating your tax situations and identifying the financial transaction that might take place either this year or next year. You should get started now, and consider these tax tips before Dec. 31, 2017.
Make a loan to your family member/Family income splitting
You can set yourself for tax savings in 2018 by making a loan to your lower-income spouse, family members or family trust so that he or she can pay the tax on any investment income on these dollars going forward. To avoid the attribution rules, you will need to charge the prescribed rate of interest on the loan. Until Dec. 31 the rate is 1% and can be locked at this rate indefinitely. Your family member will have to pay the interest on the investment by Jan. 30 each year, for the previous year’s interest charge. You will have to report the interest on this investment and your spouse can claim a deduction for it. You can come out ahead as a family, if your family member earns more than 1 percent annually on the investments.
Lend money for a TFSA contribution
In a TFSA account, all dividends, interests and capitals gains your investments make are tax-free. This is a huge advantage because as you continue to reinvest dividends and interest, the compounding income will also be tax-free. So before Dec. 31 consider lending money to your spouse or adult child to contribute towards his or her TFSA. The contribution limit to a TFSA for 2017 is $5,500, and up to $52,000 in total if you have been 18 or older since 2009 when TFSA was introduced, and you haven’t contributed yet. The attribution rules won’t apply to TFSAs since there is no taxable income, as long as the money remains in the plan.
Tax Loss Selling
If you own investments with unrealized capital losses, consider selling them before year end to realize the loss and apply it against any of the net capital gains you have realized during the year or in the prior three years. If you intend on doing this, consider completing all trades prior to December 22, 2017.
Invest the Canada Child Benefit in your child’s name
Canada Child benefit (CCB) was introduced in 2016 and provides a meaningful payment to many families on a monthly basis. CCB is a tax-free monthly payment made to eligible families to help them with a cost of raising children under the age of 18. The benefit payments are recalculated every year in July based on the income tax and benefit return information of the previous year. Consider investing these dollars in your child’s name, in an in-trust account. The attribution rules will not be applied to the income and growth of these dollars, as they can be reported in the hands of your child, generally facing little or no tax. This strategy can allow the funds to compound at a much faster rate.
Utilize first-time home buyer incentives
If you purchased your first home in 2017, or plan to buy a place before Oct. 1, 2018, You should consider making a withdrawal of up to $25,000 from your registered retirement savings plan (RRSP) before Dec. 31, under the home buyers’ plan. The withdrawals can be made tax-free if you qualify, even though you will have to repay the withdrawal amount over a 15-year period. The withdrawals under Home buyers’ plan must normally be made in a single calendar year. You may also qualify for the first time home buyers’ credit i.e. a maximum of $750 (and if you live in Saskatchewan you may be entitled to an additional provincial credit of up to $1100.)
Utilize the Lifelong Learning Plan
The lifelong learning plan (LLP) allows you to withdraw amounts from your RRSP to finance full-time training or education (or part-time if you have a disability) for yourself and your spouse or common-law partner. Consider making a withdrawal before Dec. 31, you are entitled to withdraw up to $10,000 annually or $20,000 in total from LLP. You will have to repay the withdrawal amount over time.
Have you maximized your RRSP Contributions or is it time to wind-up your RRSP?
Technically, you have until March 1, 2018 to make your RRSP contribution for 2017, however if you turned 71 in 2017 and need to wind up your RRSP, remember you only have until December 31, 2017 to make a contribution to your RRSP for 2017, not March 1, 2018.
Evaluate your estate plans for non-resident children
You should revisit your estate planning if your children are not currently residing in Canada, and particularly if they plan to remain non-residents long term. Consider adjusting your will or other planning for non-resident children and plan it together with your kids.
Consider tax changes south of the border
If you are a U.S. citizen residing in Canada, you should be alert to any proposed taxed changes in U.S which can affect your tax planning heading into next year. President Donald Trump’s tax proposals include reducing the number of tax brackets and increasing the dollar thresholds where the rates apply, increasing the standard deduction, eliminating the deduction for medical costs and state and local taxes, and eliminating the alternative minimum tax, among other things.
Consider talking to us prior to year end if you would like to act on any of these tips.
Payments due by December 31, 2017
● RESP Contributions
● Charitable gifts
● Contribution to your RRSP if you turned 71 during 2017 (you will also have to wind up your RRSP by this date.)
● Medical Expenses
● Union and professional membership dues
● Investment counsel fees, interest and other investment expenses
● Political contributions
● Deductible legal fees
● Interest on student loans
● Certain child/spousal support payments
Working with us to create your financial plan helps you identify your long and short term life goals. When you have a plan, it’s easier to make decisions that align with your goals. We outline 8 key areas of financial planning:
It has certainly been a busy week in terms of announcements regarding financial policies for small businesses. Following the series of proposed tax reforms that the government announced back in July, various tweaks and changes have subsequently been made, owing, perhaps in part, to confusion and frustration expressed among the small business community. This week Finance Minister, Bill Morneau, has made further clarifications and adjustments to his original set of proposals, aiming to bring more of a sense of balance to the plans. Like all policy changes, the detail can be a little overwhelming, so here is a summary of the key points for your reference:
Of course, this is one area of government policy which is not only constantly changing, but particularly controversial in the current climate, so keep yourself updated regularly on new announcements and news, to ensure your understanding in this area and its potential impact on your family and business. If you have any questions, please talk to us.
These 4 reasons will compel you to revisit your estate planning
For most of the people, a watertight estate planning means finding the best ways to equip themselves for contingencies, reduce the tax liability for their estate, and signing up for investment plans to ensure that their money continues to earn money for them. Undeniably, the components mentioned above underlie at the core of estate planning. However, there are a couple of crucial aspects at the periphery; which, when addressed effectively will provide a layer of protection to your estate planning. Unfortunately, most of the times they either get ignored or else are dealt rather inefficiently.
Here are the four key components that will fortify your estate planning:
Make a Will
You never know what tomorrow has in store for you. Therefore, irrespective of your age get a will done first thing first. A survey done by CIBC last year revealed that almost 50% of Canadians do not have a will. It’s a fact that shouts out widespread ignorance prevailing in the arena of estate planning concerning the significance of making a will. Another prominent rationale behind creating a will is that if the deceased one leaves no will behind him/her, the government becomes the ultimate authority to decide how the execution of the estate will take place. In such a scenario, the chances are that your assets never reaches your loved ones for whom you had created it and may go to the wrong people indeed. Creating a will is one of the most emotional decisions of your life. However, they come out best when approached pragmatically. Take some time out of your busy schedule to safeguard the interest of your people.
Reassess your estate plan when encountered with a sudden life event
Life is a zigzag graph and never a straight line. Major occurrences might just come across you path in the most unexpected ways and at the most unanticipated times. It could be marriage or divorce. It could be the second marriage. Or else, it could be a sudden financial upheaval or abrupt gains. In such a situation, never forget to reassess your estate plan and make the necessary adjustments that suit your existing situation best. Otherwise also, doing a periodic reassessment of your estate plan keeps you future-ready.
Share your estate plan
Talk about your estate plan to your loved ones. Share the details of your estate planning with your family. Agreed that managing expectations of one and all and gratifying every member’s desire is a task, which is so hard to accomplish that it never happens. Still, let your kin sneak a peek into your estate planning. You can always reason with your family about your decision and your motive behind it. Besides, they also get a chance to present their opinion to you about your verdict when you are still alive and eating dinner with them.
While planning your estate rather choose your heart than the brains
However, in your quest to create a mastermind estate plan, do not lose your focus. So many times just to save on paying taxes; you may end up taking decisions that may make you regret later. Let your heart rule when it comes to matters of succession and transfer of your estate.
Please don’t hesitate to contact us for a review of your estate plan.
BC Finance Minister Carole James delivered the province’s 2017 budget update on Sept. 11, 2017. The budget anticipates a surplus of $46 million for the current year, $228 million in 2018-2019 and $257 million in 2019-2020. As a result of the provincial election on April 11, 2017, the measures previously announced were not fully enacted.
Here’s the new budget proposals:
For first time home buyers to save property transfer tax on the purchase of their property the partial exemption has been increased to $500,000 from $475,000.
To learn how these changes will affect you, please don’t hesitate to contact us.
The month of July saw a set of proposed tax changes announced by the Federal Minister of Canada which are potentially the most impactful and significant amendments since the large-scale tax reform of 1972. We will go on to describe the detail and impact of the proposals, which fall into three main areas, below. In summary, however, the purpose of the changes introduced by the government is broadly to close the potential current perceived tax loopholes that exist for higher earners and owners of private corporations. In response to the proposals, the government is inviting views and opinions on the changes during a consultation period which will last until October 2 2017.
If a high earning individual moves a proportion of their income to a family member such as children or a spouse who hold a lower tax rate in an attempt to reduce the total amount of tax payable, this is known as income sprinkling. To mitigate this, the government is proposing to include adult children in the eligibility rules in addition to minors, as well as taking a “reasonability” approach to assessing their income and thus which rate the transferred income should be taxed at. This will mark a change to the current TOSI (tax on split income) rules which currently apply.
2. Minimizing the incentives of keeping passive investments in CCPCs
Currently, it can be advantageous for corporations to keep excess funds in a CCPC due to the fact that the corporate tax rate on the first $500,000 of taxable income is often much lower than the tax that would be payable by an individual. The government is moving to make this option less beneficial by the following two initiatives: firstly, by the removal of the option of crediting the capital dividend account (known as the CDA) equal to the amount of the non-taxable portion of any capital gains and secondly by removing the refundability of passive investment taxes.
3. Reducing the transfer of corporate surpluses to capital gains
Tax advantages can currently be achieved by the sharing out of corporate surpluses to shareholders through dividends or salaries, which are often taxed at a lower rate than if earned as personal income. This is due to the fact that just 50% of capital gains are taxable.
Retirement planning can be challenging, we’ve outlined what we feel are 6 steps to retirement success.
Talk to us about a complimentary comprehensive review of your retirement plan.