When it comes to year-end tax, there are many different tricks and tips an owner of a small business can follow in order to save. Throughout the contents of this blog, I will be telling you five different strategies to follow in order to save money at year-end tax. The first strategy is known as the Bonus Strategy. In order to put things into context let’s look at this strategy through this example. Let’s imagine your company declares a bonus of $50,000, which would lead to your financial statement reading $50,000 under bonus expenses as well as bonus payable. Thus, by following this tip, the company can record a bonus payable without paying the actual bonus by the end of the year and still claim a tax deduction, at the corporate tax rate of 13%, you can save $6,500 on your taxes. Another way to use the bonus strategy is known as the “Small Business Deduction Limit”. You should know that the first $500,000 of taxable income of your company will be taxed at 13%, while any amount over $500,000 will be taxed at 26%. In order to get out of paying the higher rate, declare a bonus in the amount you have in excess to the $500,000 in taxable income. This bonus will in theory bring your taxable income for the year end down to the $500,000, which will allow you to be taxed at 13% and not the higher rate. The only clause in this strategy is that the bonus must be paid six months prior to the company’s year-end.
The second strategy is writing off your assets. Buying assets at year end is the best time, as you can claim depreciation for anywhere between six months to even a year, even if you’ve only had the assets for a short amount of time. Let’s say your company bought an asset, such as a couple of desks, even if you’ve not been invoiced for them by the supplier, record those expenses under accounts payable, these are used in order to reduce the taxable income in a company for the year and are called Accrued Operating Expenses.
The third strategy in this blog has to do with income splitting with dividends. Under the Liberal Government and their TOSI law, it got difficult to do this, but there are three exceptions to get around the TOSI law and pay dividends to your family members. The first exception is if the company is a non-service business, meaning that less than 90% of total income derives form service, and the family member is an adult and owns at least 10% of the company, then he/she can receive dividends. The second exception is if the family member works in the company (at least 20 hours a week), he/she is over the age of 18, and if the dividend amount is reasonable, the family member can receive dividends. The third and final exception to the TOSI law is, if a family member invest in your business. If the family member who has invested in your business is over the age of 25 and is receiving her returns at market rate, is then eligible to receive dividends.
Another strategy one can use is called the RRSP Strategy. Your RRSP limit, up to a maximum of $26,500, is 18% of income earned in the preceding year. RRSP contributions also have the benefit of being tax deductible and income derived from RRSP held investments are tax sheltered. If you pay yourself a bonus and put the whole amount into a RRSP you wouldn’t have to pay any tax on the bonus as the tax payable on the bonus would be wiped out by the RRSP deduction.
The last strategy is called Tax-Loss Selling. Capital losses are restricted in three ways:
- Capital Loss can only be deducted from capital gains
- Capital loss can be carried back three years to offset capital gain
- Capital loss can be carried forward indefinitely