Year-end tax planning tips for business owners

Take steps now to avoid paying too much tax later

At year end, business owners are often scrambling to confirm inventories, fulfill orders, coordinate staffing, and tie up any loose ends before the holidays. What’s often overlooked during this hectic time is one of the most essential year-end duties – tax planning.

The pace of business can make the life of a small business owner challenging, especially when it comes to accounting, corporate tax filings, and other tax matters. On top of running a successful business, entrepreneurs have to always keep in mind their tax situation and whether they have missed any deductions or are paying too much in tax.

On the flip side, being self-employed also means you have access to a variety of tax-planning strategies not available to the general population. Here's a look at some important tax issues to consider before year-end.

Claim home office expenses

Some small business owners may be unaware that they can claim a portion of their household expenses if they work from home and meet one of the following criteria:

• The work space is where you mainly (more than 50% of the time) do your work.
• You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your work duties.

These expenses include rent, utilities, property tax, home insurance, and mortgage interest. Though you cannot claim 100% of these expenses, claiming a portion will still save you a lot come tax time.

Purchasing capital assets at year end

Most businesses require some sort of capital assets to operate. These can include office furniture or upgrades, computer hardware and software, and other equipment necessary for the business to run. Whenever possible, the purchasing of such equipment should be made towards the end of the year. In doing so, businesses can claim a full year of depreciation (subject to the half-year rule) even though the assets were only in use for a few weeks or months.

Consider the optimum salary/dividend mix

In some cases, you may want to pay enough salary to reduce the corporation's income to the level at which it will qualify for the Small Business Deduction. Many factors affect decisions regarding the optimal salary/dividend mix, including cash flow needs, personal and corporate income levels, the corporation's tax status, and your Registered Retirement Savings Plan (RRSP) contributions.

Delay bonuses

If your business has a year-end after July 6, it can declare a bonus to you at year-end, but pay it after December 31. The corporation can then claim a deduction in its current fiscal year, and you can defer personal tax on the bonus until the subsequent calendar year. Note that the tax on the bonus must be remitted to the tax department within six months of the company's fiscal year-end.

Deduct health insurance premiums

Self-employed individuals and unincorporated business owners may deduct premiums for supplementary health coverage, subject to certain restrictions.

Pay the taxes on time

If you are self-employed, your tax return does not have to be filed until June 15, but any taxes owing will be due by April 30.

Pay salaries to family members

Family businesses provide special opportunities to split income with family members. Your business can pay a salary or wages to your spouse and children as long as the payment is reasonable for the work performed.

Examine capital gains exemptions for family members

A special $800,000 capital gains exemption is available on the sale of "qualified small business corporation shares.” Make sure your corporation meets that definition on an ongoing basis. This will also preserve your ability to claim allowable business losses with respect to a loss on the corporation's shares.

There may even be opportunities to further amplify use of this exemption. Each family member who is a shareholder may be able to take advantage of the capital gains exemption. Learn more on how to protect against future capital gains tax.

Abide by the family trust rules

When a minor child receives income from a trust or partnership with a business carried on or participated in by a relative, it will be taxed at the top marginal rate, regardless of the child's tax bracket. Dividends and other shareholders' benefits on unlisted shares of Canadian companies will also be taxed at the top rate.

Consider an estate freeze

An estate freeze can be used to transfer the future growth of a business, or other assets, to your children and defer tax for decades.

Effective personal and business tax planning can be a complex matter so be sure to take advantage of professional advice. Contact your BlueShore Financial business advisor today – we can provide you with the information and resources you need to ensure you take best advantage of the tax benefits available to you.