Determine optimal salary-dividend mix for the owner-manager and family members to minimize overall taxes by considering:
Marginal tax rates
Corporation’s tax rate
Provincial health and/or payroll taxes
RRSP contribution room
CPP contributions
Other deductions and credits such as donations and child-care expenses
Establish deductibility of salaries and bonuses by ensuring they were reasonable and at year-end they were paid or accrued and properly documented as legally payable.
Bonuses must be paid within 179 days of having been accrued in order to be deductible (and the appropriate source deductions must be paid on the due date to support the bonus).
It may be beneficial to pay a reasonable salary to a family member who provided services to the Company and is in a lower tax bracket (reasonableness is generally determined in relation to the value of the services provided).
A salary or bonus to a family member allows them to have earned income for CPP, RRSP and child-care expense purposes.
An owner-manager should also consider whether a non-salary amount received by the family member is subject to the tax on split income (TOSI) rules:
Review dividend compensation strategy for related adults to determine if/when they have made substantial labour contributions to the private Company (substantial is generally an average of at least 20 hours per week during the year or any of five previous years); Canada Revenue Agency (CRA) has indicated that auditors will inspect timesheets, schedules, logbooks, and payroll records to determine the number of hours an individual worked. {excluded business}
For family members over 25 years of age who own shares in the Company (that is not in the business of providing services or a professional corporation) ensure that they own directly at least 10% of the Company’s shares measured by votes and value {excluded shares}
Ensure that a shareholder that is under the age of 25 years who works in the business but less than 20 hours per week is paid a reasonable salary (and not dividend compensation).
Review the Company’s share structure to ensure that the shareholders own different classes of shares, allowing shareholders to receive different amounts of dividends.
Changes in the rules for passive income earned in Corporations for years beginning after 2018 result in some considerations for the owner-manager:
Consider capping the invested funds at about $1 million;
Consider deferring the sale of portfolio investments with accrued gains if passive investment income approaches the $50,000 threshold in a given year; and
Consider investing in alternative investment vehicles, such as certain life insurance policies and individual pension plans, which should not be subject to the passive investment rules.
Corporate income
Identify doubtful accounts receivable to be claimed at year end.
Identify obsolete inventory to be written off at year end.
Ensure intercompany charges are reasonable and consider adjustments that reduce overall taxes for the related group.
Consider making tax-effective withdrawals by paying tax-effective dividends or repaying shareholder loans.
If the Company has a capital dividend account balance, consider paying non-taxable capital dividends prior to triggering any accrued capital losses on the sale of assets.
Pay final corporate income tax balances prior to the tax due date to avoid non-deductible interest charges.
Depreciable assets
In order to claim capital cost allowance (CCA), a depreciable asset must be purchased AND available for use at its year end.
New Accelerated Investment Incentive (AII) allows an increased first-year CCA deduction which is generally 1.5 times the standard CCA deduction (3 times for property subject to the ½ year rule), to a maximum of 100%.
Consider delaying the sale of a depreciable asset that will result in recapture until after the Company’s 2019 taxation year-end.
Sales tax
Ensure that the applicable GST was correctly charged, collected and remitted on taxable supplies and ITCs have been claimed on eligible expenses.
Determine whether GST must be remitted on amounts reported as an employee’s taxable benefit.
Written by Shannon Sekulich
I obtained a diploma in Business Administration – Accounting Option from Camosun College in 1999 and shortly thereafter wrote and passed the Graduate Management Admission Test, allowing me to apply for admission as a student in the School of Chartered Accountancy at the Institute of Chartered Accountants of British Columbia.
