Business Owners: 2020 Tax Planning Tips for the End of the Year

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It’s a great time to review your business finances now that we are nearing year-end. Your business may be affected by recent tax changes or new measures to help with financial losses due to COVID-19. Figuring out the tax ramifications of these new measures can be complicated, so please don’t hesitate to consult your accountant and us to determine how this may affect your business finances.

We’re assuming that your corporate year-end is December 31. If it’s not, then this information will be useful when your business year-end comes up.

Below, we have listed some of the critical areas to consider and provide you with some helpful guidelines to make sure that you cover all the essentials. We have divided our tax planning tips into four sections:

  • Year-end tax checklist

  • Remuneration

  • Business tax

  • Estate

Business Year-End Tax Checklist

Remuneration

  • Salary/dividend mix

  • Accruing your salary/bonus

  • Stock option plan

  • Tax-free amounts

  • Paying family members

  • COVID-19 wage subsidy measures for employers

Business Tax

  • Claiming the small business deduction

  • Shareholder loans

  • Passive investment income including eligible and ineligible dividends

  • Corporate reorganization

Estate

  • Will review

  • Succession plan

  • Lifetime capital gains exemption

Remuneration

What is your salary and dividend mix?

Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your situation. Consider the following factors:

  • Your current and future cash flow needs

  • Your personal income level

  • The corporation’s income level

  • Tax on income splitting (TOSI) rules. When TOSI rules apply, be aware that dividends are taxed at the highest marginal tax rate.

  • Passive investment income rules

Also consider the difference between salary and dividends:

Salary

  • Can be used for RRSP contribution

  • Reduces corporate tax bill

  • Subject to payroll tax

  • Subject to CPP contribution

  • Subject to EI contribution

Dividend

  • Does not provide RRSP contribution

  • Does not reduce a corporate tax bill

  • No tax withholdings

  • No CPP contribution

  • No EI Insurance contribution

  • Depending on the province¹, receive up to $50,000 of eligible dividends at a low tax rate provided you have no other sources of income

¹The amount and tax rate will vary based on province/territory you live in.

It’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2020, salaries of $154,611 will provide the maximum RRSP room of $27,830 for 2021.

Is it worth accruing your salary or bonus this year?

You could consider accruing your salary or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2020. The source deductions are not required to be remitted until actual salary or bonus payment in 2021.

Stock Option Plan

If your compensation includes stock options, check if you will be affected by the stock option rules that went into effect on January 1, 2020. These new rules cap the amount of specific employee stock options eligible for the stock option deduction at $200,000 as of January 1, 2020. These rules will not affect you if a Canadian controlled private corporation grants your stock options.

Tax-Free Amounts

If you own your corporation, pay yourself tax-free amounts if you can. Here are some ways to do so:

  • Pay yourself rent if the company occupies space in your home.

  • Pay yourself capital dividends if your company has a balance in its capital dividend account.

  • Return “paid-up capital” that you have invested in your company

Do you employ members of your family?

Employing and paying a salary to family members who work for your incorporated business is worth considering. You could receive a tax deduction against the salary you pay them, providing that the salary is “reasonable” with the work done. In 2020, the individual can earn up to $13,229 (increased for 2020 from $12,298) and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allows for child-care deductions. Bear in mind there are additional costs incurred when employing someone, such as payroll taxes and contributions to CPP.

COVID-19 wage subsidy measures for employers

To deal with the financial hardships introduced by COVID-19, the federal government introduced two wage subsidy measures:

  • The Canada Emergency Wage Subsidy (CEWS) program. With this, you can receive a subsidy of up to 85% of eligible remuneration that you paid between March 15 and December 19, 2020, if you had a decrease in revenue over this period. You must submit your application for the CEWS no later than January 31, 2021.

  • The Temporary Wage Subsidy (TWS) program. With this program, which reduces the amount of payroll deductions you needed to remit to the CRA, you can qualify for a subsidy equal to 10% of any remuneration that you paid between March 18, 2020, and June 19, 2020. You can claim up to a maximum of $1,375 per employee and $25,000 in total.

You can apply for both programs if you are eligible. If you qualify for the TWS but did not reduce your payroll remittances, you can still apply. The CRA will then either pay the subsidy amount to you or transfer it over to your next year’s remittance.

Business Tax

Claiming the Small Business Deduction

Are you able to claim a small business deduction? The federal small business tax rate decreased to 9% in 2019. It did not increase in 2020, nor is it expected to increase in 2021. From a provincial level, there will be changes in the following provinces:

Therefore, a small business deduction in 2020 is worth more than in 2021 for these provinces.

Should you repay any shareholder loans?

Borrowing funds from your corporation at a low or zero interest rate means that you are considered to have received a taxable benefit at the CRA’s 1% prescribed interest rate, less actual interest that you pay during the year or thirty days after the end of the year. You need to include the loan in your income tax return unless it is repaid within one year after the end of your corporation’s taxation year.

For example, if your company has a December 31 year-end and loaned you funds on November 1, 2020, you must repay the loan by December 31, 2021; otherwise, you will need to include the loan as taxable income on your 2020 personal tax return.

Passive investment income

If your corporation has a December year-end, then 2020 will be the second taxation year that the current passive investment income rules may apply to your company.

New measures were introduced in the 2018 federal budget relating to private businesses, which earn passive investment income in a corporation that also operates an active business.

There are two key parts to this:

  • Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends to receive dividend refunds on some taxes. In the past, these could have been refunded when an eligible dividend was paid.

  • Limiting the small business deduction. This means that, for impacted companies, the small business deduction will be reduced at a rate of $5 for every $1 of investment income over $50,000. It is eliminated if investment income exceeds $150,000. Ontario and New Brunswick are not following these federal rules. Therefore, the provincial small business deduction is still available for income up to $500,000 annually.

Suppose your corporation earns both active business and passive investment income. In that case, you should contact your accountant and us directly to determine if there are any planning opportunities to minimize the new passive investment income rules’ impact. For example, you can consider a “buy and hold” strategy to help defer capital gains.

Think about when to pay dividends and dividend type

When choosing to pay dividends in 2020 or 2021, you should consider the following:

  • Difference between the yearly tax rate

  • Impact of tax on split income

  • Impact of passive investment income rules

Except for two provinces, Quebec and Alberta, the combined top marginal tax rates will not change from 2020 to 2021 at a provincial level. Therefore, it will not make a difference for most locations if you choose to pay in 2020 or 2021.

In Quebec and Alberta, as there will be increases in the combined marginal tax rate, you will have potential tax savings available if you choose to pay dividends in 2020 rather than 2021.

When deciding to pay a dividend, you will need to decide whether to pay out eligible or ineligible dividends. Consider the following:

  • Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)

  • Personal marginal tax rate of eligible vs. ineligible dividends (see chart below)

Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)

Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind that when ineligible dividends are paid out, they are subject to the small business deduction; therefore, the dividend gross-up is 15% while eligible dividends are subject to the general corporate tax rate, a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when selecting the type of dividend to pay out of your corporation.

Corporate Reorganization

It might be time to revisit your corporate structure, given recent changes to private corporation rules on income splitting and passive investment income to provide more control on dividend income distribution.

Before you issue dividends to other shareholders in your private company (this includes your spouse, children, or other relatives), review the TOSI rules’ impact with us or your tax and legal advisors.

Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. You don’t want to trigger TOSI, so make sure you structure this properly. If you are considering succession planning, this is the time to evaluate your corporate structure as well.

Another aspect of corporate reorganization can be loss consolidation – where you consolidate losses from within related corporate groups.

Estate

Ensure your will is up to date

If your estate plan includes an intention for your family members to inherit your business using a trust, ensure that this plan is still tax-effective; income tax changes from January 1, 2016 eliminated the taxation at graduated rates in testamentary trusts and now taxes these trusts at the top marginal personal income tax rate. Review your will to ensure that any private company shares that you intend to leave won’t be affected by the most recent TOSI rules.

Succession plan

Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax-efficient manner.

Lifetime Capital Gains Exemption

If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2020, the exemption is $883,384), where the gain is entirely exempt from tax. The exemption is a cumulative lifetime exemption; therefore, you don’t have to claim the entire amount at once.

The issues we discussed above can be complicated. Contact your accountant and us if you have any questions. We can help.

CEBA extended to October 31st. Expanded to include more businesses.

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On August 31st, Deputy Prime Minister and Minister of Finance Chrystia Freeland announced the extension of the Canada Emergency Business Account (CEBA) to October 31st, 2020. This will give small businesses 2 additional months to apply for the $40,000 loan.

In addition, the Federal Government said it was working with financial institutions to make the CEBA program available to those with qualifying payroll or non-deferrable expenses that have so far been unable to apply due to not operating from a business banking account.

Apply online at the financial institution your business banks with:

See full details on ceba

Details of the EXPANDED Canada Emergency Wage Subsidy

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On August 11th, the Government of Canada updated the calculator and Canada.ca with the changes to the Canada Emergency Wage Subsidy (CEWS).

If you’re a business owner who has suffered losses as a result of COVID-19 and did NOT qualify previously for CEWS, you may now qualify.

The changes expand the program to include more businesses for periods 5 to 9 (July 5 to November 21, 2020) and have been published on Canada.ca, here are some of the changes:

  • the subsidy rate varies, depending on how much your revenue dropped

  • if your revenue drop was less than 30% you can still qualify, and keep getting the subsidy as employees return to work and your revenue recovers

  • employers who were hardest hit over a period of three months get a higher amount

  • employees who were unpaid for 14 or more days can now be included in your calculation

  • use the current period’s revenue drop or the previous period’s, whichever works in your favour

    • for periods 5 and 6, if your revenue dropped at least 30%, your subsidy rate will be at least 75%

  • even if your revenue has not dropped for the claim period, you can still qualify if your average revenue over the previous three months dropped more than 50%

  • the maximum base subsidy rate is 60% in claim periods 5 and 6

  • the maximum base subsidy rate will begin to decline in claim period 7, gradually reducing to 20% in period 9

The Government of Canada has updated the CEWS calculator to reflect these changes and can be found here:

GO TO CEWS CALCULATOR

CERB Extended | Business Owners who did not qualify previously – expanded CEBA starts June 19th

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CERB Extended 2 more months

Great news for Canadians out of work and looking for work. The CERB will be extended another 8 weeks for a total of up to 24 weeks.

As the country begins to restart the economy, the Federal government will be making changes to the program to encourage Canadians receiving the benefit to get people back on the job. From Prime Minister Justin Trudeau’s website:

“The Government of Canada introduced the CERB to immediately help workers affected by the COVID-19 pandemic, so they could continue to put food on the table and pay their bills during this challenging time. As we begin to restart the economy and get people back on the job, Canadians receiving the benefit should be actively seeking work opportunities or planning to return to work, provided they are able and it is reasonable to do so.

That is why the government will also make changes to the CERB attestation, which will encourage Canadians receiving the benefit to find employment and consult Job Bank, Canada’s national employment service that offers tools to help with job searches.”

READ ABOUT CERB EXTENSION

More small businesses can apply for CEBA $40,000 no-interest loans

Applications for the expanded Canada Emergency Business Account (CEBA) will be accepted as of Friday, June 19th, 2020. Small businesses that are:

“… owner-operated small businesses that had been ineligible for the program due to their lack of payroll, sole proprietors receiving business income directly, as well as family-owned corporations remunerating in the form of dividends rather than payroll will become eligible this week.”

Read about expanded CEBA

Apply online at the financial institution your business banks with:

There are restrictions on the funds can be used. From their website https://ceba-cuec.ca/:

“The funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.”

Small Businesses! Applications for Canada Emergency Commercial Rent Assistance starts May 25th

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Lower rent by 75% for small businesses that have been affected by COVID-19

The Application portal for the Canada Emergency Commercial Rent Assistance (CECRA) opens at 8:00am EST on May 25th. The description from the CMHC website:

“Canada Emergency Commercial Rent Assistance (CECRA) for small businesses provides relief for small businesses experiencing financial hardship due to COVID-19. It offers unsecured, forgivable loans to eligible commercial property owners to:

  • reduce the rent owed by their impacted small business tenants

  • meet operating expenses on commercial properties

Property owners must offer a minimum of a 75% rent reduction for the months of April, May and June 2020.”

Application Dates

Due to expected high volumes of applications, the application dates will be as follows:

  • Monday – Property owners who are located in Atlantic Canada, BC, Alberta and Quebec, with up to 10 tenants who are eligible for the program

  • Tuesday – Property owners who are located in Manitoba, Saskatchewan, Ontario and the Territories, with up to 10 tenants who are eligible for the program

  • Wednesday – All other property owners in Manitoba, Saskatchewan, Ontario and the Territories

  • Thursday – All other property owners in Atlantic Canada, BC, Alberta and Quebec

  • Friday – All

Eligibility

From the CMHC website:

“To qualify for CECRA for small businesses, the commercial property owner must:

  • own commercial real property* which is occupied by one or more impacted small business tenants

  • enter (or have already entered) into a legally binding rent reduction agreement for the period of April, May and June 2020, reducing an impacted small business tenant’s rent by at least 75%

  • ensure the rent reduction agreement with each impacted tenant includes:

    • a moratorium on eviction for the period during which the property owner agrees to apply the loan proceeds, and  

    • a declaration of rental revenue included in the attestation

The commercial property owner is not and is not controlled by an individual holding federal or provincial political office.

CECRA will not apply to any federal-, provincial-, or municipal-owned properties, where the government is the landlord of the small business tenant.

Exceptions

  • Where there is a long-term lease to a First Nation, or Indigenous organization or government, the First Nation or Indigenous organization or government is eligible for CECRA for small businesses as a property owner.

  • Where there are long-term commercial leases with third parties to operate the property (for example, airports), the third party is eligible as the property owner.

  • Also eligible are post-secondary institutions, hospitals, and pension funds, as well as crown corporations with limited appropriations designated as eligible under CECRA for small businesses.

NOTE: Small businesses that opened on or after March 1, 2020 are not eligible.

* We define commercial Real Property as a commercial property with small business tenants. Commercial properties with a residential component and multi-unit residential mixed-use properties would equally be eligible with respect to their small business tenants.

NOTE: Properties with or without a mortgage are eligible under CECRA for small businesses.

What is an impacted small business tenant?

Impacted small business tenants are businesses — including non-profit and charitable organizations — that:

  • pay no more than $50,000 in monthly gross rent per location (as defined by a valid and enforceable lease agreement)

  • generate no more than $20 million in gross annual revenues, calculated on a consolidated basis (at the ultimate parent level)

  • have experienced at least a 70% decline in pre-COVID-19 revenues **

NOTE: Eligible small business tenants who are in sub-tenancy arrangements are also eligible, if these lease structures meet program criteria.

** Small businesses can compare revenues in April, May and June of 2020 to that of the same period in 2019 to measure revenue losses. They can also use an average of their revenues earned in January and February of 2020.“

For Full Details and to apply:

See details and Apply for CECRA

Expanded eligibility for CEBA $40,000 interest-free loan

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“If you are the sole owner-operator of a business, if your business relies on contractors, or if you have a family-owned business and you pay employees through dividends, you will now qualify.” – PM Justin Trudeau

Eligibility

The Prime Minister outlined the expanded eligibility for the Canada Emergency Business Account and highlighted companies such as hair salon owners, independent gym owners with contracted trainers and local physio businesses will now be eligible.  

The eligible amounts are being expanded to include businesses with 2019 total payroll between $20,000 – $1.5 million.

How do I apply?

Prior to applying, please make sure you have this information readily available:

  • Canada Revenue Agency Business Number (BN 15 digits)

  • 2019 T4 Summary of Remuneration Paid (T4SUM)

Apply online at the financial institution your business banks with:

There are restrictions on the funds can be used. From their website https://ceba-cuec.ca/:

“The funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.”

Click to Get Full Details

Apply starting Friday for Canada Emergency Student Benefit! Help on the way for seniors.

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Students can apply for $1,250 through the Canada Emergency Student Benefit starting Friday

From canada.ca:

“The Canada Emergency Student Benefit (CESB) provides financial support to post-secondary students, and recent post-secondary and high school graduates who are unable to find work due to COVID-19.

This benefit is for students who do not qualify for the Canada Emergency Response Benefit (CERB) or Employment Insurance (EI).

From May to August 2020, the CESB provides a payment to eligible students of:

  • $1,250 for each 4-week period

  • $2,000 for each 4 -week period, if you have dependants or a disability”

Learn More and Apply for CESB

Seniors to receive up to $500 one-time payment

The Government of Canada will be providing help to vulnerable seniors by providing a one-time tax-free payment of $300 for seniors eligible for Old Age Security (OAS). For seniors eligible for the Guaranteed Income Supplement (GIS), they will receive an additional $200.

Learn More about Help for Seniors

Extended! Canada Emergency Wage Subsidy extended beyond June

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On May 8th, Prime Minister Justin Trudeau announced that they will extend the Canada Emergency Wage Subsidy (CEWS) beyond June. This measure gives qualifying employers up to $847 per employee each week so they can keep people on the payroll.

Eligibility

To be eligible to receive the wage subsidy, the Government of Canada website states you must:

  • be an eligible employer. Eligible employers include:

    • individuals (including trusts)

    • taxable corporations

    • persons that are exempt from corporate tax (Part I of the Income Tax Act), other than public institutions:

      • non-profit organizations

      • agricultural organizations

      • boards of trade

      • chambers of commerce

      • non-profit corporations for scientific research and experimental development

      • labour organizations or societies

      • benevolent or fraternal benefit societies or orders

    • registered charities

    • partnerships consisting of eligible employers

    Public institutions are not eligible for the subsidy. This includes municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals.

  • have experienced an eligible reduction in revenue.

  • have had a CRA payroll account on March 15, 2020

Online Calculator

The Canada Revenue Agency launched an online calculator to help businesses determine the amount they can expect from the wage subsidy program.  

Check Eligibility
Calculate your Subsidy amount

75% Commercial Rent Assistance Program

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On April 24th, the Federal Government in partnership with the provinces and territories unveiled the Canada Emergency Commercial Rent Assistance which provides rent relief to businesses.

“I can announce that we’ve reached agreements with all provinces and territories to lower rent by 75% for small businesses that have been strongly affected by COVID-19 for April, May and June” – PM Justin Trudeau

From Prime Minister Justin Trudeau’s website:

“The government is also providing further details on the program:

  • The program will provide forgivable loans to qualifying commercial property owners to cover 50 per cent of three monthly rent payments that are payable by eligible small business tenants who are experiencing financial hardship during April, May, and June. 

  • The loans will be forgiven if the mortgaged property owner agrees to reduce the eligible small business tenants’ rent by at least 75 per cent for the three corresponding months under a rent forgiveness agreement, which will include a term not to evict the tenant while the agreement is in place. The small business tenant would cover the remainder, up to 25 per cent of the rent.

  • Impacted small business tenants are businesses paying less than $50,000 per month in rent and who have temporarily ceased operations or have experienced at least a 70 per cent drop in pre-COVID-19 revenues. This support will also be available to non-profit and charitable organizations.”

What if I have no revenue and can’t pay the remaining 25%?

For businesses who are unable to pay the remaining 25%, they should apply for the Canada Emergency Business Account (CEBA) through their bank which provides a $40,000 interest-free loan until Dec 31, 2022. $10,000 (25%) of the $40,000 loan is eligible for complete forgiveness if $30,000 is repaid on or before December 31, 2022.

Click to read more at canada.ca