Embark on Crowe Soberman’s Tax Season Odyssey, where valuable insights light your path for effective tax planning. This journey provides quick suggestions and actionable strategies to guide you through the complexities of taxation.
If you have your own corporation
Consider your optimum salary/dividend mix to achieve less overall tax
Salary will qualify you and other family members active in the business for Registered Retirement Savings Plan (RRSP) contributions, Canada Pension Plan (CPP) contributions, and child-care deductions. In contrast, dividends will not qualify an individual for these contributions or deductions.
The Tax on Split Income (TOSI) rules have made income splitting using dividends significantly more difficult. TOSI eliminates the tax benefits of paying dividends to family members (with little or no other sources of income), who are not active in the business or who do not own “excluded shares” of the company. If TOSI applies to the dividends, the recipient will pay tax on these dividends at the highest marginal tax rate. Speak to a Crowe Soberman advisor to determine whether you may benefit from income splitting opportunities under your specific circumstances.
If you have family members over the age of 17 who are actively engaged in the business (i.e., working at least 20 hours per week in the business) and own shares of the corporation (directly or indirectly through a family trust), you may split dividend income with them under certain circumstances.
Additionally, dividend income may be split with family members over the age of 24, who are not otherwise engaged in the business, but own shares of the corporation that entitle them to no less than 10 per cent of the votes and value. These shares would be considered “excluded shares,” the dividends on which are not subject to TOSI. To meet the “excluded share” exception to the TOSI rules, the corporation can neither be a professional corporation, a corporation that earns its income from the provision of services, nor a holding corporation that receives dividends from its subsidiary operating company.
Family members can be employed by your business and paid salary or wages for their services. The business is entitled to a deduction in respect of this remuneration, but only if the amount paid is reasonable for the work performed.
Consider accessing funds from the corporation that can be withdrawn tax-free. For example, repay shareholder loans, return capital to shareholders up to the lesser of the paid-up capital and the adjusted cost base of the shares, or roll in certain personal assets with a high-cost base to the corporation on a tax-deferred basis to extract the cost base of the assets on a tax-free basis.
The Tax on Split Income (TOSI) rules have made income splitting using dividends significantly more difficult. TOSI eliminates the tax benefits of paying dividends to family members (with little or no other sources of income), who are not active in the business or who do not own “excluded shares” of the company. If TOSI applies to the dividends, the recipient will pay tax on these dividends at the highest marginal tax rate. Speak to a Crowe Soberman advisor to determine whether you may benefit from income splitting opportunities under your specific circumstances.
If you have family members over the age of 17 who are actively engaged in the business (i.e., working at least 20 hours per week in the business) and own shares of the corporation (directly or indirectly through a family trust), you may split dividend income with them under certain circumstances.
Additionally, dividend income may be split with family members over the age of 24, who are not otherwise engaged in the business, but own shares of the corporation that entitle them to no less than 10 per cent of the votes and value. These shares would be considered “excluded shares,” the dividends on which are not subject to TOSI. To meet the “excluded share” exception to the TOSI rules, the corporation can neither be a professional corporation, a corporation that earns its income from the provision of services, nor a holding corporation that receives dividends from its subsidiary operating company.
Family members can be employed by your business and paid salary or wages for their services. The business is entitled to a deduction in respect of this remuneration, but only if the amount paid is reasonable for the work performed.
Consider accessing funds from the corporation that can be withdrawn tax-free. For example, repay shareholder loans, return capital to shareholders up to the lesser of the paid-up capital and the adjusted cost base of the shares, or roll in certain personal assets with a high-cost base to the corporation on a tax-deferred basis to extract the cost base of the assets on a tax-free basis.
Defer income that is not required personally for a longer period
If you do not require cash from your corporation to spend personally, consider keeping the funds invested in your corporation and defer the tax payable on the ultimate withdrawal of the funds. Note that if your corporation is carrying on an active business and the first $500,000 of profits in respect thereof are eligible for the small business deduction (SBD), earning more than $50,000 of annual investment income will reduce your corporation’s SBD entitlement. Once annual investment income exceeds $150,000, the SBD is fully eliminated. This investment income threshold applies to an associated group of corporations. Therefore, it is important to monitor the aggregate annual investment income of all associated corporations in the group when assessing the SBD eligibility.
Consider instalments for 2024
The threshold on which corporations must pay income tax, GST and source deductions instalments is $3,000. The threshold will be based on 2023 tax amounts payable.
Certain Canadian-controlled private corporations are allowed to make quarterly, instead of monthly, income tax instalments. To qualify, certain conditions must be met, including the following criteria relating to the 2023 taxation year:
- The corporation has been in perfect compliance in the previous 12 months;
- The corporation was entitled to the small business deduction;
- The taxable income of the associated group did not exceed $500,000; and
- The taxable capital of the associated group did not exceed $10 million.
Instalment planning for 2024 can be addressed during 2023 by meeting the conditions where applicable.
With interest rates on overdue tax balances expected to rise to 10 per cent effective January 1, 2024, it is extremely important to pay instalments and any balances owing in a timely manner.
Interest deductibility
Where possible, maximize interest deductions by structuring or arranging your borrowings to be incurred, first for business or investment purposes, then for personal use.
Where certain business or capital property (e.g., shares, but not real estate or depreciable property) is disposed of or ceases to earn income, the interest incurred on the related borrowing may in some cases continue to be deductible.
Did you know?
If you are self-employed
Top 3 Tax Strategies for Professionals and Business Owners
- Ensure tax instalments are paid on time to avoid significant interest costs.
- Reinvest corporate funds you do not need personally for maximum tax deferral.
- Maximize interest deductions by structuring your borrowings in a tax efficient manner.
This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.
Ananth Balasingam
Partner,
Tax
Ananth Balasingam Professional Corporation
Ross Pasceri
Partner,
Tax
Rosario Pasceri Professional Corporation