From our annual Tax Tips guide, here are the tips and suggestions for Corporation and the Self-Employed for the year 2016.
Tax Tips: If you have your own corporation
1. Consider your optimum salary/dividend mix to achieve less overall tax:
- Salary will qualify you and other family members active in the business for RRSP contributions, Canada Pension Plan (CPP) contributions, and child-care deductions. Dividends will not qualify an individual for these contributions or deductions.
- Dividends, on the other hand, may cost the family unit less in current taxes. Each family member, over 17 years of age and receiving non-eligible dividend income of approximately $32,848 or less, or $55,691 or less of eligible dividends, from taxable Canadian corporations, will pay little or no income tax (a small Ontario Health Tax premium may apply). The tax on split income eliminates the tax benefits of paying dividends to children under 18 years of age.
- Consider accessing funds from the corporation that can be withdrawn tax-free.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 personal assets with a high cost base to the corporation on a tax-free basis to extract the cost base of the assets on a tax-free basis.
2. Defer income that is not required personally for 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 extra dividend tax payable on the withdrawal of the funds.
3. Dividend income splitting with adult children:
- If you have children who are 18 years of age or older and for whom you are currently funding expenses, consider reorganizing the shareholdings of your corporation to enable income splitting with your children. A reorganization would involve your children (or a trust for their benefit) receiving dividend-paying shares of the corporation. If your children do not already earn income that is taxed at the top marginal tax rate, then the dividend income will be taxed more favourably in their hands.
4. Consider a sale of your corporation's eligible capital property (ECP) before January 1, 2017:
- The 2016 Federal Budget introduced changes to the taxation of ECP which will become effective January 1, 2017. Prior to these new rules, 50% of the gain on the sale of ECP (e.g., goodwill) would be subject to the business tax rate in the corporation (this rate could be as low as 15.5% if the corporation's total taxable income for the year is $500,000 or less). The 50% non-taxable portion of the ECP gain would be added to the corporation's capital dividend account (CDA). The result was that shareholders could extract funds from the corporation in a tax-free manner by paying out the CDA, while enjoying a significant tax deferral opportunity on the taxable portion of the ECP proceeds left inside the corporation.
- The new rules will treat ECP as any other capital property, the taxable gain in respect of the sale of which will be subject to full capital gains rates, thereby eliminating the deferral benefit.
- If you are otherwise considering a sale of the goodwill (or other ECP) of your corporation in the near future and you will be extracting funds from your corporation, consider triggering a sale thereof in the balance of calendar 2016 to take advantage of the existing ECP taxation regime.
5. Consider instalments for 2017:
- The threshold above which corporations must pay income tax, GST and source deductions instalments is $3,000. The threshold will be based on 2016 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 2016 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 2017 can be addressed during 2016 by meeting the conditions where applicable.
Tax Tips: If you are self-employed
6. If you have a home office and you meet certain conditions, you can deduct eligible home office expenses, including a portion of your mortgage interest, home insurance, property taxes, utilities and minor repairs.
7. Consider the potential benefits of incorporating your business.
Did you know?
In August of 2014, the first-ever CRA mobile app for small and medium-sized businesses was launched. The app lets business users create custom reminders and alerts for key CRA due dates related to instalment payments, returns, and remittances.
The Business Tax Reminders mobile app is now available free of charge on Apple iOS, Google Android, and BlackBerry mobile platforms. To download the mobile app, go to your app store and search "Business Tax Reminders," or visit the CRA Business Tax Reminders mobile app page.
Our annual Tax Tips can assist you in your tax planning presenting some quick ideas and strategies for you to employ. Please take the time to review your 2016 tax situation and call us for specific recommendations tailored to meet your needs. We will be pleased to work with you on these and other tax-savings ideas.
Click here to download a full copy of the Tax Tips 2016 Guide (PDF).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
