2016 Checklist for Corporations & Shareholders Year End Taxes
As the calendar year-end approaches, taxpayers have a few more weeks to organize their financial affairs. All financial transactions affecting the 2016 tax year will have a December 31, 2016 cutoff, with the exception of the RRSP contributions, which allow for an extra 60 days after year-end for contributions that will count towards the 2016 tax year.
Every Canadian has the opportunity to do some year-end tax planning, but corporate shareholders in particular have many tax planning options to consider at year-end, regardless of the fiscal year-end date of the corporation.
Here is the list of must to do for the 2016 tax planning before it is too late.
Get caught up on the company’s accounting records now
Up to date accounting records are required to determine wages paid to shareholders and draws made by shareholders during the year, as well as expected cash balances. More importantly, profitability can be better estimated with accurate and complete accounting records. Once this information is available, shareholders and business tax advisors can come up with remuneration methods, remuneration amounts, income splitting strategies and other tax-driven plans to minimize your taxes.
Determine if sales tax and income tax installments are adequate
With up to date accounting records, GST and corporate tax liabilities can also be reasonably estimated and remittances made can be compared to CRA’s records. Companies can easily assess if more payments will be required to settle tax liabilities or if overpayments have occurred. Basically, shareholder compensation may be impacted by tax funding requirements, and up to date accounting records can help develop a clearer picture of what this may mean.
Determine investment income and realized gains and loss from investment portfolios
This should be done for the corporation and the personal portfolios.
Investment income earned in the corporation are initially taxed at a high rate and create refundable tax and capital dividend pools. This can greatly impact remuneration decisions and the personal tax bills of the shareholders.
Whether corporate or personal portfolios, capital losses cannot be used to offset business profit, employment income or investment income. However, capital gains are taxed at 50% inclusion rate in a corporation and the personal account. If capital gains are realized in a corporation, tax planning is a must to extract the capital dividends on a tax free basis as soon as possible. If large capital gains are realized in a personal portfolio, consider less remuneration from the corporation for the year and the need to buy more RRSP.
Your investment advisor can provide this information for any period or calendar year readily.
RRSP contributions
No year end checklist would be complete without assessing the need to purchase RRSPs to reduce taxes. Since RRSPs are a full deduction (as opposed to a tax credit), higher income shareholders greatly benefit from contributing to an RRSP. Investment income and capital gains earned in an RRSP are tax sheltered until withdrawals are made. Contributions can be made but don’t need to be deducted until the taxpayer chooses to at some point in the future. Strategically, it is better to wait for a high-income year to deduct your RRSP contributions from your taxable income.
Shareholders can plan their remuneration ahead of time in order to buy and deduct RRSP in the most tax efficient manner.
Childcare expenses
Like RRSP deductions, childcare expenses are a full deduction (up to certain amounts), which benefits higher income taxpayers. The only trick with childcare expenses is that they can only be deducted against employment income by the lower income spouse. Again, shareholder(s) and the spouse have the ability to plan their remuneration in order to fully use the childcare expense deduction.
Being proactive now and engaging in some light planning before year-end can alleviate unexpected headaches and disappointments come April 2017!
Related Corporations & Shareholders Tax Planning Posts
- Use of Family Trust for Income Splitting
- Effective Income Splitting Needs Professional Pre-Planning
- Canadian Corporate Tax Planning: On Investing Retained Earnings
Mew & Company in Vancouver B.C.
Mew & Company Chartered Accountants in Vancouver BC are experts in helping small business owners to save time and money in managing their businesses.
If you are looking for personal or corporate tax planning services, or if you have questions, please don’t hesitate to contact us to learn more about how we can help you!
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