It’s a great time to review your business finances now that we are nearing year-end. Your business may be affected by recent tax changes or new measures to help with financial losses due to COVID-19. Figuring out the tax ramifications of these new measures can be complicated, so please don’t hesitate to consult your accountant and us to determine how this may affect your business finances.
We’re assuming that your corporate year-end is December 31. If it’s not, then this information will be useful when your business year-end comes up.
Below, we have listed some of the critical areas to consider and provide you with some helpful guidelines to make sure that you cover all the essentials. We have divided our tax planning tips into four sections:
Year-end tax checklist
Business Year-End Tax Checklist
Accruing your salary/bonus
Stock option plan
Paying family members
COVID-19 wage subsidy measures for employers
Claiming the small business deduction
Passive investment income including eligible and ineligible dividends
Lifetime capital gains exemption
What is your salary and dividend mix?
Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your situation. Consider the following factors:
Your current and future cash flow needs
Your personal income level
The corporation’s income level
Tax on income splitting (TOSI) rules. When TOSI rules apply, be aware that dividends are taxed at the highest marginal tax rate.
Passive investment income rules
Also consider the difference between salary and dividends:
Can be used for RRSP contribution
Reduces corporate tax bill
Subject to payroll tax
Subject to CPP contribution
Subject to EI contribution
Does not provide RRSP contribution
Does not reduce a corporate tax bill
No tax withholdings
No CPP contribution
No EI Insurance contribution
Depending on the province¹, receive up to $50,000 of eligible dividends at a low tax rate provided you have no other sources of income
¹The amount and tax rate will vary based on province/territory you live in.
It’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2020, salaries of $154,611 will provide the maximum RRSP room of $27,830 for 2021.
Is it worth accruing your salary or bonus this year?
You could consider accruing your salary or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2020. The source deductions are not required to be remitted until actual salary or bonus payment in 2021.
Stock Option Plan
If your compensation includes stock options, check if you will be affected by the stock option rules that went into effect on January 1, 2020. These new rules cap the amount of specific employee stock options eligible for the stock option deduction at $200,000 as of January 1, 2020. These rules will not affect you if a Canadian controlled private corporation grants your stock options.
If you own your corporation, pay yourself tax-free amounts if you can. Here are some ways to do so:
Pay yourself rent if the company occupies space in your home.
Pay yourself capital dividends if your company has a balance in its capital dividend account.
Return “paid-up capital” that you have invested in your company
Do you employ members of your family?
Employing and paying a salary to family members who work for your incorporated business is worth considering. You could receive a tax deduction against the salary you pay them, providing that the salary is “reasonable” with the work done. In 2020, the individual can earn up to $13,229 (increased for 2020 from $12,298) and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allows for child-care deductions. Bear in mind there are additional costs incurred when employing someone, such as payroll taxes and contributions to CPP.
COVID-19 wage subsidy measures for employers
To deal with the financial hardships introduced by COVID-19, the federal government introduced two wage subsidy measures:
The Canada Emergency Wage Subsidy (CEWS) program. With this, you can receive a subsidy of up to 85% of eligible remuneration that you paid between March 15 and December 19, 2020, if you had a decrease in revenue over this period. You must submit your application for the CEWS no later than January 31, 2021.
The Temporary Wage Subsidy (TWS) program. With this program, which reduces the amount of payroll deductions you needed to remit to the CRA, you can qualify for a subsidy equal to 10% of any remuneration that you paid between March 18, 2020, and June 19, 2020. You can claim up to a maximum of $1,375 per employee and $25,000 in total.
You can apply for both programs if you are eligible. If you qualify for the TWS but did not reduce your payroll remittances, you can still apply. The CRA will then either pay the subsidy amount to you or transfer it over to your next year’s remittance.
Claiming the Small Business Deduction
Are you able to claim a small business deduction? The federal small business tax rate decreased to 9% in 2019. It did not increase in 2020, nor is it expected to increase in 2021. From a provincial level, there will be changes in the following provinces:
Therefore, a small business deduction in 2020 is worth more than in 2021 for these provinces.
Should you repay any shareholder loans?
Borrowing funds from your corporation at a low or zero interest rate means that you are considered to have received a taxable benefit at the CRA’s 1% prescribed interest rate, less actual interest that you pay during the year or thirty days after the end of the year. You need to include the loan in your income tax return unless it is repaid within one year after the end of your corporation’s taxation year.
For example, if your company has a December 31 year-end and loaned you funds on November 1, 2020, you must repay the loan by December 31, 2021; otherwise, you will need to include the loan as taxable income on your 2020 personal tax return.
Passive investment income
If your corporation has a December year-end, then 2020 will be the second taxation year that the current passive investment income rules may apply to your company.
New measures were introduced in the 2018 federal budget relating to private businesses, which earn passive investment income in a corporation that also operates an active business.
There are two key parts to this:
Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends to receive dividend refunds on some taxes. In the past, these could have been refunded when an eligible dividend was paid.
Limiting the small business deduction. This means that, for impacted companies, the small business deduction will be reduced at a rate of $5 for every $1 of investment income over $50,000. It is eliminated if investment income exceeds $150,000. Ontario and New Brunswick are not following these federal rules. Therefore, the provincial small business deduction is still available for income up to $500,000 annually.
Suppose your corporation earns both active business and passive investment income. In that case, you should contact your accountant and us directly to determine if there are any planning opportunities to minimize the new passive investment income rules’ impact. For example, you can consider a “buy and hold” strategy to help defer capital gains.
Think about when to pay dividends and dividend type
When choosing to pay dividends in 2020 or 2021, you should consider the following:
Difference between the yearly tax rate
Impact of tax on split income
Impact of passive investment income rules
Except for two provinces, Quebec and Alberta, the combined top marginal tax rates will not change from 2020 to 2021 at a provincial level. Therefore, it will not make a difference for most locations if you choose to pay in 2020 or 2021.
In Quebec and Alberta, as there will be increases in the combined marginal tax rate, you will have potential tax savings available if you choose to pay dividends in 2020 rather than 2021.
When deciding to pay a dividend, you will need to decide whether to pay out eligible or ineligible dividends. Consider the following:
Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)
Personal marginal tax rate of eligible vs. ineligible dividends (see chart below)
Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)
Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind that when ineligible dividends are paid out, they are subject to the small business deduction; therefore, the dividend gross-up is 15% while eligible dividends are subject to the general corporate tax rate, a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when selecting the type of dividend to pay out of your corporation.
It might be time to revisit your corporate structure, given recent changes to private corporation rules on income splitting and passive investment income to provide more control on dividend income distribution.
Before you issue dividends to other shareholders in your private company (this includes your spouse, children, or other relatives), review the TOSI rules’ impact with us or your tax and legal advisors.
Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. You don’t want to trigger TOSI, so make sure you structure this properly. If you are considering succession planning, this is the time to evaluate your corporate structure as well.
Another aspect of corporate reorganization can be loss consolidation – where you consolidate losses from within related corporate groups.
Ensure your will is up to date
If your estate plan includes an intention for your family members to inherit your business using a trust, ensure that this plan is still tax-effective; income tax changes from January 1, 2016 eliminated the taxation at graduated rates in testamentary trusts and now taxes these trusts at the top marginal personal income tax rate. Review your will to ensure that any private company shares that you intend to leave won’t be affected by the most recent TOSI rules.
Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax-efficient manner.
Lifetime Capital Gains Exemption
If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2020, the exemption is $883,384), where the gain is entirely exempt from tax. The exemption is a cumulative lifetime exemption; therefore, you don’t have to claim the entire amount at once.
The issues we discussed above can be complicated. Contact your accountant and us if you have any questions. We can help.
On November 30, Finance Minister Chrystia Freeland provided the government’s fall economic update. The fall economic update provided information on the government’s strategy both for dealing with the COVID-19 pandemic and its plan to help shape the recovery. We’ve summarized the highlights for you.
Corporate Tax Changes
Information on several subsidy programs was included in the update. These changes apply from December 20, 2020 to March 13, 2021.
The government has provided an increase in the Canada Emergency Wage Subsidy (CEWS) to a maximum of 75% of eligible wages.
If you are eligible for the Canada Emergency Rent Subsidy (eligibility is based on your revenue decline), you can claim up to 65% of qualified expenses.
The Lockdown Support Subsidy has also been extended – if you are eligible, you can receive a 25% subsidy on eligible expenses.
Also, there were two other significant corporate tax changes:
Starting January 1, 2022, the government plans to tax international corporations that provide digital services in Canada if no international consensus on appropriate taxation has been reached.
The tax deferral on eligible shares paid by a qualifying agricultural cooperative to its members has been extended to 2026.
Personal Tax Changes
The following personal tax changes were included in the update:
The update confirmed the government’s plan to impose a $200,000 limit (based on fair market value) on taxing employee stock options granted after June 2021 at a preferential rate. Canadian-controlled private corporations (CCPCs) are not subject to these rules.
If you started working from home due to COVID-19, you could claim up to $400 in expenses.
The Canada Child Benefit (CCB) has temporarily been increased to include four additional payments. Depending on your income, you could receive up to $1200.
Additional modifications were proposed to how the “assistance holdback” amount is calculated for Registered Disability Savings Plans (RDSP). The goal of these modifications is to help RDSP beneficiaries who become ineligible for the Disability Tax Credit after 50 years of age.
Indirect Tax Changes
GST/HST changes impacting digital platforms were included in the update. They will be applicable as of July 1, 2021:
Foreign-based companies that sell digital products or services in Canada must collect and remit GST or HST on their taxable sales. Also, foreign vendors or digital platform operators with goods for sale via Canadian fulfillment warehouses must collect and remit GST/HST.
Short-term rental accommodation booked via a digital platform must charge GST/HST on their booking. The GST/HST rate will be based on the province or territory where the short-term accommodation is located.
And some good news on a GST/HST removal! As of December 6, and until further notice, the government will not charge GST/HST on eligible face masks and face shields.
A lot of changes came out of the fall update – and you may be feeling overwhelmed. But help is at hand!
Contact us to learn more about how these changes could impact your personal and business finances.
Canada Emergency Business Account (CEBA) $20,000 expansion available now
On July 17th, Finance Minister Bill Morneau announced proposed changes to the Canada Emergency Wage Subsidy (CEWS) that will expand the number of businesses that qualify for the program.
The major changes he announced were:
“First, we’re proposing to extend this program through until December 19th.”
“Secondly, we know that it’s also critical that we have the businesses able to continue to hire people even as they get into the restart and we know that the requirements in businesses have a 30% reduction in revenue is not helpful in that regard.”
“businesses will get the wage subsidy if they’ve had any reduction in revenue so it’s going to go all the way down to businesses who even have a small amount of revenue reduction they’ll get the subsidy and it will be in proportion to the amount of the revenue reduction that they will get a subsidy.”
“Third, we’ve tailored the program so that it helps those organizations that are particularly hard hit. So for organizations with over a 50% reduction of revenue over the last few months they’ll actually get a top up, they’ll get up to 25% additional subsidy so that they can deal with this really challenging time for their businesses.”
“What that means for businesses, those that were already in the program that have that 30% revenue decline that will continue to be the case for July and August. For those businesses as I said that are particularly hard hit it will be even more. It will go up to 85% wage subsidy or $960 per person.”
“For those businesses less hard hit but still hit they will be able to get into the program. The program will continue but as we restart, the program will be tailored to help businesses appropriately in that restart.”
The new rules will be retroactive to July 5th but require parliamentary approval.
Great news for Canadians out of work and looking for work. The CERB will be extended another 8 weeks for a total of up to 24 weeks.
As the country begins to restart the economy, the Federal government will be making changes to the program to encourage Canadians receiving the benefit to get people back on the job. From Prime Minister Justin Trudeau’s website:
“The Government of Canada introduced the CERB to immediately help workers affected by the COVID-19 pandemic, so they could continue to put food on the table and pay their bills during this challenging time. As we begin to restart the economy and get people back on the job, Canadians receiving the benefit should be actively seekingwork opportunities or planning to return to work, provided they are able and it is reasonable to do so.
That is why the government will also make changes to the CERB attestation, which will encourage Canadians receiving the benefit to find employment and consult Job Bank, Canada’s national employment service that offers tools to help with job searches.”
More small businesses can apply for CEBA $40,000 no-interest loans
Applications for the expanded Canada Emergency Business Account (CEBA) will be accepted as of Friday, June 19th, 2020. Small businesses that are:
“… owner-operated small businesses that had been ineligible for the program due to their lack of payroll, sole proprietors receiving business income directly, as well as family-owned corporations remunerating in the form of dividends rather than payroll will become eligible this week.”
“The funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.”
The much anticipated revised Saskatchewan Budget was delivered on June 15th, 2020 by Finance Minister Donna Harpauer. The budget now anticipates a deficit of $2.4 billion for 2020/2021.
Personal Tax Highlights
New Residential Home Construction PST rebate
“Our government has also introduced a PST rebate for new residential home construction of up to 42% of the PST paid on a new house contract up to $350,000, excluding the land, for new homes purchased after March 31, 2020 and before April 1, 2023. The new rebate will help the province’s construction industry, homebuilders, and associated trades to create jobs. And it will help Saskatchewan families to afford a newly built home.” – Finance Minister Donna Harpauer
Indexation of Personal Income Tax system
“This budget reintroduces full indexation of the Personal Income Tax system, beginning with the 2021 tax year, protecting taxpayers from “bracket creep”—automatic increases in tax caused by inflation.” – Finance Minister Donna Harpauer
Corporate Tax Highlights
Oil Infrastructure Investment Program
“The Oil Infrastructure Investment Program, a SaskFirst new growth tax incentive administered by the Ministry of Energy and Resources, has been introduced to support new and expanded pipelines, as well as new pipeline terminals, to flow oil to market.” – Finance Minister Donna Harpauer
Chemical Fertilizer Tax Incentive
“This budget also introduces a new Saskatchewan Chemical Fertilizer Incentive, providing a 15 percent tax credit to encourage new investment that will grow Saskatchewan’s value-added sector.” – Finance Minister Donna Harpauer
Manufacturing and Processing Exporter Tax Incentive
The M&P Exporter Tax Incentive provides non-refundable tax credits to eligible corporations that expand the number of M&P-related full time employees above the number that were employed in 2014. Eligible businesses are those that derive at least 25% of revenues from the export to the rest of Canada or internationally of their manufactured goods each year and that:
“manufacture or process” goods for sale as defined in the federal Income Tax Act; or
are principally involved in the commercial development of “new economy” products for export, including interactive digital media products and creative industry products.
Please don’t hesitate to contact us if you have questions about how the budget will affect you.
Lower rent by 75% for small businesses that have been affected by COVID-19
The Application portal for the Canada Emergency Commercial Rent Assistance (CECRA) opens at 8:00am EST on May 25th. The description from the CMHC website:
“Canada Emergency Commercial Rent Assistance (CECRA) for small businesses provides relief for small businesses experiencing financial hardship due to COVID-19. It offers unsecured, forgivable loans to eligible commercial property owners to:
reduce the rent owed by their impacted small business tenants
meet operating expenses on commercial properties
Property owners must offer a minimum of a 75% rent reduction for the months of April, May and June 2020.”
Due to expected high volumes of applications, the application dates will be as follows:
Monday – Property owners who are located in Atlantic Canada, BC, Alberta and Quebec, with up to 10 tenants who are eligible for the program
Tuesday – Property owners who are located in Manitoba, Saskatchewan, Ontario and the Territories, with up to 10 tenants who are eligible for the program
Wednesday – All other property owners in Manitoba, Saskatchewan, Ontario and the Territories
Thursday – All other property owners in Atlantic Canada, BC, Alberta and Quebec
“To qualify for CECRA for small businesses, the commercial property owner must:
own commercial real property* which is occupied by one or more impacted small business tenants
enter (or have already entered) into a legally binding rent reduction agreement for the period of April, May and June 2020, reducing an impacted small business tenant’s rent by at least 75%
ensure the rent reduction agreement with each impacted tenant includes:
a moratorium on eviction for the period during which the property owner agrees to apply the loan proceeds, and
a declaration of rental revenue included in the attestation
The commercial property owner is not and is not controlled by an individual holding federal or provincial political office.
CECRA will not apply to any federal-, provincial-, or municipal-owned properties, where the government is the landlord of the small business tenant.
Where there is a long-term lease to a First Nation, or Indigenous organization or government, the First Nation or Indigenous organization or government is eligible for CECRA for small businesses as a property owner.
Where there are long-term commercial leases with third parties to operate the property (for example, airports), the third party is eligible as the property owner.
Also eligible are post-secondary institutions, hospitals, and pension funds, as well as crown corporations with limited appropriations designated as eligible under CECRA for small businesses.
NOTE: Small businesses that opened on or after March 1, 2020 are not eligible.
* We define commercial Real Property as a commercial property with small business tenants. Commercial properties with a residential component and multi-unit residential mixed-use properties would equally be eligible with respect to their small business tenants.
NOTE: Properties with or without a mortgage are eligible under CECRA for small businesses.
What is an impacted small business tenant?
Impacted small business tenants are businesses —including non-profit and charitable organizations — that:
pay no more than $50,000 in monthly gross rent per location (as defined by a valid and enforceable lease agreement)
generate no more than $20 million in gross annual revenues, calculated on a consolidated basis (at the ultimate parent level)
have experienced at least a 70% decline in pre-COVID-19 revenues **
NOTE: Eligible small business tenants who are in sub-tenancy arrangements are also eligible, if these lease structures meet program criteria.
** Small businesses can compare revenues in April, May and June of 2020 to that of the same period in 2019 to measure revenue losses. They can also use an average of their revenues earned in January and February of 2020.“
Financial planning for business owners is often two-sided: personal financial planning and planning for the business.
Business owners have access to a lot of financial tools that employees don’t have access to; this is a great advantage, however it can be overwhelming too. A financial plan can relieve this.
A financial plan looks at where you are today and where you want to go. It determines your short, medium and long term financial goals and how you can reach them. For you, personally and for your business.
Why do you need a Financial Plan?
Worry less about money and gain control.
Organize your finances.
Prioritize your goals.
Focus on the big picture.
Save money to reach your goals.
For a business owner, personal and business finances are connected. Therefore both sides should be addressed: Personal and Business.
What does a Financial Plan for a Business include?
There are 2 main sides your business financial plan should address: Growth and Preservation
Cash Management- Managing Cash & Debt
Tax Planning- Finding tax efficiencies
Retaining & Attracting Key Talent
Investment- either back into the business or outside of the business
Insurance Planning/Risk Management
What does a Personal Financial Plan include?
There are 2 main sides your financial plan should address: Accumulation and Protection
Cash Management – Savings and Debt
What’s the Financial Planning Process?
Establish and define the financial planner-client relationship.
Gather information about current financial situation and goals including lifestyle goals.
Analyze and evaluate current financial status.
Develop and present strategies and solutions to achieve goals.
Monitor and review recommendations. Adjust if necessary.
Talk to us about helping you get your finances in order so you can achieve your lifestyle and financial goals.
Feel confident in knowing you have a plan to get to your goals.
Business owners are increasingly recognizing the key importance of implementing employee benefit plans in their organization and this is an area that has grown considerably in recent decades. Employee benefits comprise all of the additional things that you offer to your employees on top of their regular salary, which could include pension contributions, health cover / insurance policies, training and education programs etc. Employees are more and more interested in the total benefits package that a potential employer can offer them, rather than just being focused on a binary salary figure and recognizing and understanding this cultural shift in the modern working world is crucial to maintain your ability to recruit and retain the right talent for your business.
Many employees value the benefits that their employer offers, considering them an integral part of their take home pay, none more so than health cover. This benefit can provide financial and emotional security to your employees and their families, without the need for them to complete any health requirements to be on the plan. They are likely to benefit from a preferable level of cover and the plan may even provide them with insurance products such as long-term disability cover, which can be harder to gain outside of a group plan. What’s more, group plans often offer out-of-country emergency healthcare for employees which has the potential to save them money on personal travel insurance products.
Not only do these benefits provide a sense of security to your employees, they can also help them to feel valued as part of your organization, which may in turn foster higher morale and increased motivation within their roles. It is therefore worthwhile for business owners to encourage their teams to recognize the fact that the benefits package that you offer should be considered as an integral part of their take home pay, alongside their actual salary.