As we all know, Dec. 31st is coming real fast and I advise all my clients to ensure that they doing some year end tax planning. Below is a great summary prepared by the accounting firm, Bessner Gallay Kreisman LLP. As usual, please do not hesitate to contact me directly should you have any questions.
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2010 YEAR END TAX PLANNING
Salary/Dividend Planning
Many factors must be considered in determining the most beneficial combination of remunerating the owner/manager of a closely-held corporation. As with other planning, each case must be examined separately and no one "rule of thumb" can apply to all situations.
Here are a few factors that should be taken into consideration:
• The tax rate of the corporation
• The marginal tax rate of the individual
• Exposure to Alternative Minimum Tax
• The ability to benefit from child care expenses, paternity/maternity benefits and to make RRSP and CPP/QPP contributions is based on salary and not dividend income
• Wage levies applicable to salaries, such as the Ontario Employer Health Tax and Quebec's Health Services Fund and 1% Training Tax (if the payroll exceeds $1,000,000)
• Quebec restrictions on the deductibility of investment expenses by individuals where expenses exceed investment income
• Whether eligible dividends can be paid to shareholders
• Full or partial loss of the dividend credit if taxable income is not high enough
• Higher net income with a dividend than with a salary, as dividend income is grossed up by 44% or 25% (depending on whether the dividend is eligible or not) which can have an impact on certain credits and benefits
Some planning techniques include:
• If the corporation has Refundable Dividend Tax on Hand (RDTOH), the payment of a dividend will result in a refund of 33 1/3% of the dividend payment up to a maximum of the RDTOH balance
• Remuneration that is accrued and expensed by a corporation must be paid to the employee within 179 days of the corporation's year-end. When a year-end falls after July 5, the corporation can cause the owner/manager's remuneration to fall into either the current or subsequent calendar year
Freeze or Refreeze?
An estate freeze is used to ensure that future growth in the value of a company accumulates in the hands of a shareholder's heirs. This is accomplished by "freezing" the current fair market value of the company in the form of preferred shares. If the value of a business subsequently decreases, the benefits of freezing may not be fully realized and it may be advantageous to consider "unfreezing" and "refreezing" a company.
Refreezing enables taxpayers to exchange their old preferred shares, obtained at the time of the initial freeze, for new shares with a lower redemption price. Any future gains in value will then be passed on to the holders of common shares. This type of planning helps reduce tax on the death of taxpayers by lowering the redemption price of their preferred shares and transferring more value to their heirs.
Income Splitting
Investment income earned by an individual who invested money borrowed at low or no interest from a related person will be attributed back to the lender. Subject to a purpose test, this rule does not apply where the loan is to a related person other than a spouse or minor child. Nor will it apply where the loan is to a spouse or minor child if interest is charged at the prescribed rate in effect at the time the loan is made (the prescribed rate for the fourth quarter of 2010 is 1%). When utilizing this exception, interest must be paid no later than 30 days after the end of the year to avoid attribution of income.
For instance, the high-income spouse could lend investment funds to the low-income spouse at the current 1% rate and receive (and pay tax on) the interest income each year, for as long as the loan remains outstanding. The low-income spouse would pay tax on the income generated by the funds and deduct the interest paid to the high-income spouse.
Since the attribution rules are complex, caution is advised when contemplating a transfer of property or a loan to a spouse or a child (including transfers indirectly through a corporation or a trust).
Some other basic planning ideas would include:
• Gifting growth assets to a minor child, as the resulting capital gain is not attributed to the donor
• Gifting property to a child who is not a minor
• Segregating and re-investing "attributed" income of a spouse or minor child
• Deposit Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB) and Quebec Child assistance payments (CAP) directly into accounts opened in the children's names
• Use the income of the spouse with the higher income to pay all the family's expenses so that the spouse with the lower income has more capital available for investment
• Using a trust for the benefit of family members to hold shares of a closely-held corporation. However, there are restrictions in regard to income-splitting with minor children
• Spouses can choose to share their QPP and CPP retirement pensions
• Have your spouse as your business partner or pay reasonable salaries to your spouse or children
Shareholder Loans
Any loan granted by a corporation to an individual who is a shareholder or to a person with whom the shareholder does not deal at arm's length will be taxable in the year in which the loan is advanced, unless a particular exception applies.
If the loan meets one of these exceptions, the shareholder will be required to pay to the corporation interest at a rate at least equal to the prescribed rate no later than January 30 each year. If a shareholder loan exists at any time during the year, a taxable benefit must be calculated based on the prescribed interest rate, less the interest actually paid.
When a loan is repaid, the shareholder may claim a deduction up to the amount that had been included in income. It might be worthwhile for a corporation to make a loan to an adult child of the shareholder at a time when the child does not have much income. The loan may be repaid in a subsequent year, when the child's marginal tax rate is higher.
Since shareholder loans are not deductible from a corporation's income and do not generate refunds of RDTOH it is recommended that shareholders verify whether it would be more advantageous to be paid a salary or a dividend. It is very important that any loan contract between a corporation and one of its shareholders be adequately documented.
Capital Gains Exemption
A capital gains exemption is available for individuals to use in relation to gains realized on qualified small business corporation shares and some other properties. The maximum lifetime capital gain exemption is $750,000. Be aware of the possible disadvantage of selling investments eligible for the $750,000 capital gains exemption and investments with losses in the same year. Capital losses realized in the year must be offset against capital gains of that year including "exempt" gains. Consider selling investments with losses the following year. Subject to certain conditions an individual may defer capital gains on eligible small business investments to the extent that the proceeds are reinvested in another eligible small business. The reinvestment must be made at any time in the year of disposition or within the first 120 days of the following year.
Acquisition of Assets
Accelerate the acquisition of depreciable property used in carrying on a business otherwise planned for the beginning of the next year. This will allow additional depreciation (CCA) to be claimed in the current year. The "available-for-use rules" should be considered (generally requiring the depreciable property to be used in operations for the depreciation deduction to be allowed).
Conversely, consider delaying until the subsequent year the acquisition of depreciable property in a class that would otherwise have a terminal loss in the current year.
Eligible new computers and software acquired before February 2011 are entitled to a capital cost allowance of 100% the first year in which the assets are available for use. Computers purchased after January 2011 will revert to a CCA rate of 55% and be subject to the half-year rule.
Death Benefit
A corporation can make a onetime tax free payment of up to $10,000 to the spouse or heirs of a deceased employee. This payment will not be taxable to the recipient and will be fully deductible by the corporation.
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