2022 Year End Tax Tips and Strategies for Business Owners

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Now that we’re approaching the end of the year, it’s time to review your business finances. We’ve highlighted the most critical tax-planning tips you need to know as a business owner.

Salary/Dividend Mix

As a business owner, an essential part of tax planning is determining if you receive salary or dividends from the business.

When you’re paid a salary, the corporation can claim an income tax deduction, which reduces its taxable income. You include this pay in your personal taxable income. You’ll also create Registered Retirement Savings Plan (RRSP) contribution room. 

The alternative is the corporation can distribute a dividend to you. The corporation must pay tax on its corporate income and can’t claim the dividend distributed as a deduction. However, because of the dividend tax credit, the dividend typically pays a lower tax rate (than for salary) on eligible and non-eligible dividends. 

In addition to paying yourself, you can consider paying family members. These are the main options you can consider when determining how to distribute money from your business:

  • Pay a salary to family members who work for your business and are in a lower tax bracket. This enables them to declare an income so that they can contribute to the CPP and an RRSP. You must be able to prove the family members have provided services in line with the amount of compensation you give them.

  • Pay dividends to family members who are shareholders in your company. The amount of dividends someone can receive without paying income tax on them will vary depending on the province or territory they live in.

  • Distribute money from your business via income sprinkling, which is shifting income from a high-tax rate individual to a low-rate tax individual. However, this strategy can cause issues due to tax on split income (TOSI) rules. A tax professional can help you determine the best way to “income sprinkle” so none of your family members are subject to TOSI.

  • Keep money in the corporation if neither you nor your family members need cash. Taxes can be deferred if your corporation retains income and the corporation’s tax rate is lower than your tax rate.

No matter what strategy you take to distribute money from your business, keep in mind the following:

  • Your marginal tax rate as the owner-manager.

  • The corporation’s tax rate.

  • Health and payroll taxes

  • How much RRSP contribution room do you have?

  • What you’ll have to pay in CPP contributions.

  • Other deductions and credits you’ll be eligible for (e.g., charitable donations or childcare or medical expenses).

Compensation

Another important part of year-end tax planning is determining appropriate ways to handle compensation. Compensation is financial benefits that go beyond a base salary.

These are the main things to consider when determining how you want to handle compensation:

  • Can you benefit from a shareholder loan? A shareholder loan is an agreement to borrow funds from your corporation for a specific purpose and offers deductible interest.

  • Do you need to repay a shareholder loan to avoid paying personal income tax on your borrowed amount? 

  • Is setting up an employee profit-sharing plan a better way to disburse business profits than simply paying a bonus?

  • Keep in mind that when an employee cashes out a stock option, only one party (the employee OR the employer) can claim a tax deduction on the cashed-out stock option.

  • Consider setting up a retirement compensation arrangement (RCA) to help fund your or your employee’s retirement. 

Passive Investments

One of the most common tax advantages available to Canadian-controlled private corporations (CCPC) is the first $500,000 of active business income in a CCPC qualifies for the small business deduction (SBD), which reduces the corporate tax rate by 12 to 21 percent, depending on the province or territory. 

With the SBD, you can reduce your corporate tax rate, but remember that the SBD will be reduced by five dollars for every dollar of passive investment income over $50,000 your CCPC earned the previous year.

The best way to avoid losing any SBD is to ensure that the passive investment income within your associated corporation group does not exceed $50,000.

These are some of the ways you can make sure you preserve your access to the SBD:

  1. Defer the sale of portfolio investments as necessary.

  2. Adjust your investment mix to be more tax efficient. For example, you could hold more equity investments than fixed-income investments. As a result, only 50% of the gains realized on shares sold are taxable, but investment income earned on bonds is fully taxable.

  3. Invest excess funds in an exempt life insurance policy. Any investment income earned on an exempt life insurance policy is not included in your passive investment income total. 

  4. Set up an individual pension plan (IPP). An IPP is like a defined benefit pension plan and is not subject to the passive investment income rules.

Depreciable Assets

Consider speeding up the purchase of depreciable assets for year-end tax planning. A depreciable asset is a capital property on which you can claim Capital Cost Allowance (CCA).

Here’s how to make the most of tax planning with depreciable assets:

  • Make use of the Accelerated Investment Incentive. This incentive makes some depreciable assets eligible for an enhanced first-year allowance.

  • Purchase equipment such as zero-emissions vehicles and clean energy equipment eligible for a 100 percent tax write-off.

  • Consider postponing the sale of a depreciable asset if it will result in recaptured depreciation for your 2022 taxation year.

Qualified Small Business Corporation (QSBC) Share Status

Ensure your corporate shares are eligible to get you the $913,630 (for 2022) lifetime capital gains exemption (LCGE). The LCGE is $1,000,0000 for dispositions of qualified farm or fishing property.

Suppose you sell QSBC shares scheduled to close in late December 2022 to January 2023. In that case, you may want to consider deferring the sale to access a higher LCGE of $971,190 for 2023 and therefore defer the tax payable on any gain arising from the sale.

Consider taking advantage of the LCGE and restructuring your business to multiply access to the exemption with other family members. But, again, you should discuss this with us, your accountant and legal counsel to see how this can benefit you. 

Donations

Another essential part of tax planning is to make all your donations before year-end. This applies to both charitable donations and political contributions.

For charitable donations, you need to consider the best way to make your donations and the different tax advantages of each type of donation. For example, you can:

  • Donate Securities

  • Give a direct cash gift to a registered charity

  • Use a donor-advised fund account at a public foundation. A donor-advised fund is like a charitable investment account.

  • Set up a private foundation to solely represent your interests.

We can help walk you through the tax implications of these types of charitable donations.

Get year-end tax planning help from someone you can trust!

We’re here to help you with your year-end tax planning. So book a meeting with us today to learn how you can benefit from these tax tips and strategies.

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2022 Personal Year-End Tax Tips

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The end of 2022 is quickly approaching – which means it’s time to get your paperwork in order so you’re ready when it comes time to file your taxes!

In this article, we’ve covered four different major types of 2022 personal tax tips:

  • Investment Considerations

  • Individuals

  • Families

  • Retirees

  • Students

Investment Considerations

Tax-Free Savings Account (TFSA)-You can contribute up to a maximum of $6000 for 2022. You can carry forward unused contribution room indefinitely. The maximum amount you’re allowed to make in TFSA contributions is $81,500 (including 2022).

Registered Retirement Savings Plan (RRSP)- Contribute to your RRSP or a spousal RRSP. Remember that you can deduct contributions made within the first sixty days of the following calendar year from your 2022 income. You also have the option of carrying forward deductions. Consider the best mix of investments for your RRSP: hold growth investments outside the plan (to benefit from lower tax rates on capital gains and eligible dividends), and hold interest-generating investments inside. We can help if you need advice on how to make the most of your RRSP.

Do you expect to have any capital losses? If you have capital losses, sell securities with accrued losses before year end to offset capital gains realized in the current or previous three years. You must first deduct them against your capital gains in the current year. You can carry back any excess capital losses for up to three years or forward indefinitely.

Interest Deductibility – If possible, repay the debt that has non-deductible interest before other debt (or debt that has interest qualifying for a non-refundable credit, i.e. interest on student loans). Borrow for investment or business purposes and use cash for personal purchases. You can still deduct interest on investment loans if you sell an investment at a loss and reinvest the proceeds from the sale in a new investment.

Individuals

The following list may seem like a lot, but it’s unlikely every single tip will apply to you. It’s essential to make sure you aren’t paying taxes unnecessarily.

COVID-19 federal benefits – If you repay any COVID-19 benefit amounts before 2023, you can deduct from your income the repayment amount in the year in which the benefit amount was received instead of the year it was repaid. (You can also split the deduction between the two years.)

Income Timing – If your marginal personal tax rate is lower in 2023 than in 2022, defer the receipt of certain employment income; if your marginal personal tax rate is higher in 2023 than in 2022, accelerate.

Worked at home in 2022?-You may be able to deduct an income tax deduction for home office expenses. The Canada Revenue Agency (CRA) has extended the availability of the simplified method—claiming a flat rate of $2 per day working at home due to the COVID-19 pandemic—to 2022. Consider what’s more advantageous for you to claim: the simplified or traditional method.

Medical expenses – If you have eligible medical expenses that weren’t paid for by either a provincial or private plan, you can claim them on your tax return. You can even deduct premiums you pay for private coverage! Either spouse can claim qualified medical expenses for themselves and their dependent children in a 12-month period, but it’s generally better for the spouse with the lower income to do so.

Charitable donations – Tax credits for donations are two-tiered, with a more considerable credit available for donations over $200. You and your spouse can pool your donation receipts and carry donations forward donations for up to five years. If you donate items like stocks or mutual funds directly to a charity, you will be eligible for a tax receipt for the fair market value, and the capital gains tax does not apply.

Moving expenses – If you’ve moved to be closer to school or a place of work, you may be able to deduct moving expenses against eligible income. You must have moved a minimum of 40 km.

Families

Childcare Expenses – If you paid someone to take care of your child so you or your spouse could attend school or work, then you can deduct those expenses. A variety of childcare options qualify for this deduction, including boarding school, camp, daycare, and even paying a relative over 18 for babysitting. Be sure to get all your receipts and have the spouse with the lower net income claim the childcare expenses. In addition, some provinces offer additional childcare tax credits on top of the federal ones.

Caregiver – If you are a caregiver, claim the available federal and provincial/territorial tax credits.

Children’s fitness, arts and wellness tax credits – If your child is enrolled in an eligible fitness or arts program, you may claim a provincial or territorial tax credit for fitness and arts programs.

Estate planning arrangements – Review your estate plan annually to ensure it reflects the current tax rules. Review your will to ensure that it will form a valid will. Consider strategies for minimizing probate fees.

Registered Education Savings Plan (RESP) – can be a great way to save for a child’s future education. The Canadian Education Savings Grant (CESG) is only available on the first $2,500 of contributions you make each year per child (to a maximum of $500, with a lifetime maximum of $7,200.) If you have any unused CESG amounts for the current year, you can carry them forward. If the recipient of the RESP is now 16 or 17, they can only receive the CESG if a) at least $2,000 has already been contributed to the RESP and b) a minimum contribution of $100 was made to the RESP in any of the four previous years.

Registered Disability Savings Plan (RDSP) – If you have an RDSP open for yourself or an eligible family member, you may be able to get both the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) paid into the RDSP. The CDSB is based on the beneficiary’s adjusted family net income and does not require any contributions to be made. The CDSG is based on both the beneficiary’s family net income and contribution amounts. In addition, up to 10 years of unused grants and bond entitlements can be carried forward.

Retirees

Registered Retirement Income Fund (RRIF) – Turning 71 this year? If so, you are required to end your RRSP by December 31. You have several choices on what to do with your RRSP, including transferring your RRSP to a registered retirement income fund (RRIF), cashing out your RSSP, or purchasing an annuity. Talk to us about the tax implications of each of these choices!

Pension Income- Are you 65 or older and receiving pension income? If your pension income is eligible, you can deduct a federal tax credit equal to 15% on the first $2,000 of pension income received – plus any provincial tax credits! Don’t currently have any pension income? You may want to think about withdrawing $2,000 from an RRIF each year or using RRSP funds to purchase an annuity that pays at least $2,000 per year.

Canada Pension Plan (CPP) – If you’ve reached the age of 60, you may be considering applying for CPP. Keep in mind that if you do this, the monthly amount you’ll receive will be smaller. Also, you don’t have to have retired to be able to apply for CPP. Talk to us; we can help you figure out what makes the most sense.

Old Age Security – If you’re 65 or older, ensure you’re enrolled for Old Age Security (OAS) benefits. Retroactive OAS payments are only available for up to 11 months plus the month you apply for your OAS benefits. If you’re running into OAS “clawback” issues, consider ways to split or reduce other sources of income to avoid this.

Estate planning arrangements – Review your estate plan annually to ensure that it reflects the current tax rules. Consider strategies for minimizing probate fees. If you’re over 64 and living in a high probate province, consider setting up an inter vivos trust as part of your estate plan.

Students

Education, tuition, and textbook tax credits – If you’re attending post-secondary school, claim these credits where available.

Canada training credit – If you’re between 25 to 65 and enrolled in an eligible educational institution, you can claim a federal tax credit of $250 for 2021. You can claim tuition paid on your taxes, carry the amount forward, or transfer an unused tuition amount to a spouse, parent, or grandparent.

Need some additional guidance?

Reach out to us if you have any questions. We’re here to help.

Estate Planning for Blended Families

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Blended families – where two people get married but have children from previous relationships – are becoming more common. It can be challenging enough to take care of the everyday logistics; from where to live to making sure everyone gets along. So trying to make sure you properly take of estate planning often doesn’t get taken care of.

In most families – blended or not – spouses leave everything to each other. Then, when the surviving spouse dies, the remainder is divided amongst all of the children. The problem with this setup is that there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.

To make sure that everyone is treated fairly, it’s essential to consider how to handle each of the following estate planning issues for blended families:

  • Sharing the Family Home

  • Make the Most of a Registered Retirement Savings Plan

  • How to Share Non-Registered Investments and Other Assets

  • Why It’s Important to Select a Good Trustee

  • The Advantages of Life Insurance for Blended Family Estate Planning

It’s essential to have a full discussion with your spouse and children to avoid misunderstandings and reduce uncertainty. But you don’t have to do it alone! We can provide you with tailored solutions to ensure your wishes are carried out.

Sharing The Family Home

This can be challenging, depending on whether the blended family moves into a new home or into a house one spouse already owns. An option to consider is that the spouse who is moving into the home already owned by the other spouse can then purchase an interest in the family home. If this occurs, each spouse can own the home as tenants-in-common, enabling them to manage their interest in the house separately.

When it comes time for each spouse to draw up a will, provisions can be made for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.

Make the Most of a Registered Retirement Savings Plans

The best way to take advantage of the tax-free rollover from an RRSP is for each spouse to name each other the beneficiary. While it may be tempting to leave your RRSP to your estate or one or more of your children, this can have ramifications. If you leave it to your estate, it will have to go through probate and also be taxed. If you leave it an adult child, the RRSP won’t have to go through probate, but the entire RRSP will be considered taxable to the deceased in the year of death.

How to Share Non-Registered Investments and Other Assets

You can set up your estate planning so that your spouse can benefit from income-producing assets during their lifetime, without necessarily impacting the capital in those assets. Your children can then benefit from them after your spouse dies.

Each spouse can set up a spousal testamentary trust to contain their income-producing investments and assets. The surviving spouse will then receive all the income from the trust and the option to access the capital for specific needs (if specified in the trust). After the surviving spouse dies, the assets will pass to whoever was identified as the trust’s inheritors. You can make the inheritors your children. This ensures that both your spouse and your children are taken care of.

Why It’s Important to Select a Good Trustee

Trusts are a vital part of effective estate planning for blended families. This means that it’s critical to pick the right trustee – as they will control and manage the assets of the deceased’s estate as outlined in the deceased’s will. You may even want to consider multiple trustees or the services of a trust company. A strong but neutral trustee will help ensure that your wishes are followed without causing fighting amongst family members.

Advantages of Life Insurance for Blended Family Estate Planning

There are several advantages to using life insurance policies as part of your estate planning for blended families:

  • The death benefit is tax-free. You can have it paid out in cash directly or create trusts, so the capital goes to your spouse while they live and your children after your spouse dies.

  • Since you can name the beneficiary, you can control who inherits the proceeds. It’s not considered part of the will, so it cannot be included in any wills variation action (more commonly known as challenging the will).

  • If one spouse enters the marriage with significantly more wealth than the other, life insurance can help create a fair division of assets.

The Takeaway

No matter what choices you make about estate planning for your blended family, you must communicate openly and honestly with everyone in the family. This will help ensure that everyone is aware of the state of affairs and reduces misunderstandings and uncertainty about what the future may hold for everyone in the family.

Using professional advice while you are estate planning for blended families can help you create a solution that satisfies both spouses and their respective children’s objectives. Reach out to me if you have any questions or concerns about your estate planning – I’m here to help!