As the end of the year draws nigh, it is time for business owners everywhere to start contemplating some end of year tax planning tips to not only ensure that they can maximize their tax deductions and reduce taxes payable, but to streamline the tax filing process in the New Year. Even if you are incorporated and your year end date is not December 31st, it is a good time to take advantage of calendar year deadlines for personal tax planning purposes.
Organize & File – While not necessarily a direct method for saving taxes, ensuring that you have all your proverbial ducks in a row is the starting point for efficient tax planning. Many small business save all of their bookkeeping/revenue and expense tracking right to the end, which often results in missed deductions and higher taxes (not to mention unnecessary stress). Reviewing government correspondence can be especially beneficial particularly if there are some interest or penalties that are due and accumulating or if there has been a change in some reporting deadlines. Even if you are not sure what is what (a common problem for business owners specifically when looking at government correspondence) keep everything in a file to present to your accountant, who should be able to provide valuable guidance on how to interpret these cryptic notices.
Make Instalment Payments – Many business owners ignore instalment payment notices and then are hit with large amounts of interest (Revenue Quebec can be particularly punitive) which can be easily avoided by making quarterly instalments of GST/HST/QST , corporation tax and personal income taxes. Information on instalments can be found on your tax return as well as via letters that both Revenue Canada and Revenue Quebec will send. Failing that you can speak to your accountant, call the Revenue Agencies or sign up for online services that will allow you to see the status of your accounts.
Advance Purchases of Supplies and Capital Assets – If you are planning , for example, to buy a computer, a more ergonomically structured office chair or need some office supplies, and your year-end falls on December 31st , it might make sense to make these purchases before the year end (cash flow permitting) to take advantage of the expense deduction. Note that high value items like chairs and computers are considered to be capital assets which cannot be fully expensed in one year, however you will get the depreciation deduction regardless of when you purchase it in the year.
Declare year-end bonuses – You and your employees have worked hard and of course deserve to be compensated. If you have sufficient cash flow, declaring bonuses are a great way to reduce year end profit and consequently taxes payable. The other advantage is that you can declare bonuses in the current fiscal year and pay them in the following year (within six months) so that the business gets the benefit of the tax deduction right away while the employee only needs to declare it in the following year.
Take Dividends Earlier – While this is not usually a tax planning tip as dividends are not tax deductible, the effective taxes payable are increasing in 2014 for non eligible dividends. As such it might make sense to withdraw more dividends before the end of the year. This should be done carefully and in the context of other sources of income to ensure that you have a good balance.
Keep Income in the Corporation – If you are an incorporated business and are fortunate enough to be earning more than you require for your personal needs, it makes sense to retain the income in the corporation which will allow you to defer taxes. A small business corporation in Quebec pays corporation taxes at a rate of 19%, while and individual’s marginal tax rate can be as high as 50%. As soon as you take the money out of the corporation, it is subject to personal income taxes.
Transfer Savings to TFSAs– All Canadian individuals should be contributing to TFSAs. The limit for 2013 is $5,500 and while there is no tax deduction for contributions all investment income (including capital gains, interst, dividends etc.) accumulate tax free.
Invest in RRSPs – The single most tax reduction strategy is to contribute to RRSPs, the benefits of which are directly proportional to your tax rate. If your marginal tax rate is 40%, you will essentially reduce your taxes payable by $4,000 for a $10,000 RRSP contribution as compared with a $3,000 reduction for a 30% marginal tax rate. Deadline to contribute is end of February.
Donate – It is a great time of year to be generous as, not only do you get that soft fuzzy feeling, you are also entitled to a tax deduction. Keep in mind that only Canadian charities are tax deductible unless you have US source income from which you can deduct donations to US charities. Deadline to contribute is December 31st.
While you don’t have to spend days on tax planning (which may or may not be less fun than Christmas shopping), it is prudent to ponder what you might need to do in the next month or so to ensure that you are not scrambling at the last minute.