This time of year the hustle and bustle of the holiday season takes over. For many, taxes and financial planning take a back burner as we engage in the festivities that December brings. However, the end of the 2018 calendar year signals the final opportunity to take advantage of many tax considerations. For business owners, it is important to understand how these may impact your business goals in the New Year.
Outlined below are some of the most significant discussion points to have with your financial advisor, planner or accountant before year-end to ensure you are on track for 2019:
1. Capital Asset Additions and Dispositions before December 31st
Tax regulation limits the amount of capital cost allowance (CCA) that can be claimed in the year of acquisition of most depreciable property. This is known as the “half-year rule” where a business can only claim half of the CCA attributable to net acquisitions in the year. If you are planning on purchasing capital assets for use in the business in the near future, it should be considered before the end of the fiscal year. Assets that are acquired and in use before the fiscal year-end enable you to claim half of the usual amount of CCA this year to reduce business income for tax purposes, and allow a full year’s CCA claim next year. In contrast, delaying the purchase until the new fiscal year allows only half of the CCA to be claimed for that entire year. Bear in mind that title to the asset must be acquired and the asset must be available for use in the current fiscal year to claim CCA this year.
Conversely, if you plan to sell capital assets with accrued gains, you might consider delaying the sale until 2019 (or the start of their business’ next fiscal year). This will allow the business to claim one additional year of CCA and will also delay the inclusion of any taxable capital gains or recaptured CCA in taxable income by one year.
Similarly, you may consider deferring dispositions of property or investments to the beginning of the following year if capital gains are expected on the sale. Again, this will delay the associated tax by a full tax year. However, if capital losses are expected from the sale of property, you may find it beneficial to sell in the current year to incur the loss to help offset earlier accrued capital gains.
2. Review outstanding loans to shareholders:
Shareholders of corporations who have received loans from the company should be aware of income inclusion provisions if those loans are not repaid in accordance with tax regulation. Loans to shareholders must be repaid to the corporation within one year from the end of the corporation’s taxation year in which the loan was made. If the loan is not repaid in this time the loan will be included in the personal income of the borrower. As an added bite to this rule, the amount of the loan-turned-income is not deductible as an expense to the corporation.
3. Tax On Split able Income (TOSI)
New rules apply for 2018 that are designed to limit the amount of income-splitting options available to owners of CCPCs (Canadian Controlled Private Corporations). Essentially income, dividends or capital gains received from a corporation where a related person either owns at least 10% or is actively involved in the management of the company can get caught by these new rules. However, if a shareholder contributes at least 20 hours per week to the business the TOSI rules may not apply. Further, as long as shareholders of non-professional corporations own 10% or more of the outstanding shares and are older than 24 years old, the TOSI rules may also not apply.
A review of the share structure before the end of 2018 is important as the 10% ownership rule must be met by the end of the calendar year. This is a very complex area of planning and care must be taken to understand and avoid this income implication.
4. Investment Accounts and the Small Business Deduction (SBD).
Generally, the first $500,000 of active business income in a CCPC qualifies for a lower tax rate. As of 2019 income from passive sources (like an investment portfolio of stocks, bonds or mutual funds), otherwise known as Adjusted Aggregate Investment Income (AAII) may reduce the amount of active business income that qualifies for the SBD. Investment income which qualifies as AAII earned in 2018 will reduce the amount of SBD available for certain Canadian corporations. The SBD will be reduced by $5 for every $1 of AAII that is earned above $50,000 in the previous year.
There are multiple strategies that can be reviewed to limit income which is considered to be AAII:
- Moving investment allocations away from interest and dividends toward investments that create deferred capital gains.
- Purchasing assets that create active business income.
- Investments that provide tax-deferred distributions.
- Estate bond insurance strategies.
- Creating Individual Pension Plan for key shareholders.
- Monitoring when to take capital gains and when to trigger capital losses. This is perhaps the greatest tool business owners have access to this late in 2018. Being careful not to trigger excess gains in 2018 may be key to maintaining access to the full SBD in 2019.
By having a better understanding of the various year-end tax and planning concepts that impact your business, you will be better prepared for success in 2019. A CWB Wealth Management Senior Planner can work in step with your financial management team ensuring your tax situation is aligned with your overall wealth management strategy. To find out more visit cwbwealth.com.
This document is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon as advice. Please contact your lawyer, accountant or other advisor for relevant advice. CWB Group takes reasonable steps to provide up-to-date, accurate and reliable information but is not responsible for any errors or omissions contained herein. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by CWB Group or any other person as to its accuracy, completeness or correctness. CWB Group reserves the right at any time and without notice to change, amend or cease publication of the information. Visit cwbwealth.com for the full disclaimer.