We are now entering the last few months of the year before the changes take effect in 2019 pertaining to small business corporation taxation.
We will address this with a new three part SNiPS series on planning around these tax changes.
This is also a result of the response and interest in our recent three part SNiPS series on Caregiver related tax credits and the prior SNiPS series as to the income tax benefits of life insurance.
it’s time to look at how small corporations can reduce the impact of the changes on their bottom lines.
Strategies fall into one of the three following buckets. Tips to follow in the next few immediate & subsequent SNiPS related to:
- Reducing active business income
- Reducing passive income
- A combination of both
Reducing Active Business Income
If the current year’s passive income can be reasonably forecast (something by the by we try to do with as many willing clients as possible including the income attribution related what if/sensitivity analysis) , then so can your small business deduction (SBD). As a result, if your ABI can be reduced to be at or below your anticipated SBD level , then you can avoid the soon to be higher general corporate tax rate. Here are some ideas for doing so.
a. Revisit your compensation mix: Additional salaries and bonuses are employment income, reported on a T4. They are also used to be deducted from ABI.
b. Pay salaries to spouse and children: If the salary is reasonable for the job, this income splitting strategy is still viable.
Reducing Passive Income
Directly reducing passive income or passive investment assets within your corporation can also reduce the impact of the upcoming tax changes. There are several ways to do this.
a. Realize capital losses in the current year: Capital loss carryforward amounts will not help, as any used are added back as part of the adjusted aggregate investment income (AAII) calculation for determining passive income levels. That said, capital losses realized in the current year can offset capital gains also realized in the current year. This can be beneficial if you are rebalancing current passive assets to reduce passive income in future years.
b. Invest in low-taxable income and low-distribution assets: Investments that generate little or no taxable income, such as corporate class mutual funds, will result in less passive income now and possibly in future years. Some mutual funds trusts also follow investment strategies that minimize taxable distributions.
c. Consider T-series mutual funds: T-series provide an income stream consisting primarily of return of capital (ROC), which is not taxable. Using passive assets within the corporation in conjunction with T-series to provide liquidity can be tax effi cient and won’t impact passive income for AAII purposes.
d. Don’t forget expenses: Expenses incurred to generate passive income, such as interest expenses or investment counsel fees, can be used to reduce passive income.
e. Repay shareholder loans: Using passive assets to repay outstanding shareholder loans can reduce passive investment income.
f. Pay dividends from the Capital Dividend Account (CDA): Funding capital dividends with funds from passive assets can reduce such balances, which in turn can reduce passive income. Capital dividends are also received tax-free by the shareholder, not impacting their personal tax position.
g. Combine multiple years’ transactions: When considering rebalancing passive assets, funding dividends to corporate shareholders with passive assets or expanding operations, you can combine multiple years’ transactions into one. This may allow the negative impact of realized capital gains on the SBD to occur only once.
h. Purchase corporate-owned life insurance: Investments in a life insurance policy are generally tax sheltered. This can reduce passive investment asset balances while addressing a planning need for you and your corporation.
As always if you have any questions or would like to discuss please do not hesitate to let me know.
If you would like more details relative to your own specific situation please do not hesitate to let me know.
LGC Smithers and Associates are Accounting, Book Keeping, Payroll & Income Tax Specialists based in Dundas, Ontario. We serve businesses in the greater Hamilton area and offer expert tax advice. Contact us today to discuss how we can help with your financial needs at 905-627-2910.