Canadian private business owners can reduce balance owing and increase the potential for a refund by preparing for their tax return now instead of waiting until April, according to EY Canada’s Top 5 year-end tax considerations for private companies that outlines the opportunities for savings.
“Although this very strange year is coming to an end, we expect the impact of what has happened to linger for an extended period of time,” says Sanjaya Ranasinghe, EY Canada Partner, Tax.
“Companies of all shapes and sizes have felt the effects of COVID-19 and, for many, that’s underscored the importance of making every dollar count. Private business owners that plan early will invariably end up in a better tax position in 2020 and beyond than those who do not.”
EY suggests Canadian private business owners consider these five questions to identify savings opportunities on their 2020 tax bill and beyond. It also provides answers to each.
Do you have an opportunity for estate planning and freeze transactions?
The values of many private corporations have suffered during the COVID-19 pandemic. This may present an opportunity to “freeze” the value of your company at the current depressed prices and undertake planning to transfer the future growth value of the business to family members, and possibly defer the payment of tax on that future growth for an extended period of time.
Have you considered the impact of changing provincial corporate tax rates in 2020?
Generally, a corporation resident in Canada will be subject to provincial or territorial tax where it has a permanent establishment (e.g., an office, factory or warehouse, or where a corporation carries on business through an employee or agent).
If a corporation has multiple permanent establishments, differences in corporate tax rates between the provinces may provide an opportunity to reduce the company’s overall effective tax rate.
Have you considered the payment of dividends to recover corporate refundable tax?
A Canadian-controlled private corporation that earns investment income during the year may be subject to a corporate refundable tax. This refundable tax balance is tracked through the “eligible refundable dividend tax on hand” (ERDTOH) and “non-eligible refundable dividend tax on hand” (NERDTOH) balances.
Do you have employees working from home?
Many employees have been tasked with working from home due to the pandemic. As a result, employees have incurred additional expenses on everything from office furniture to higher utility bills.
As announced in the Nov. 30 economic statement, the Canada Revenue Agency (CRA) will permit a simplified deduction of up to $400 for employees working from home due to the pandemic. The CRA will generally not require any documentation to support this deduction.
For employees who have incurred more than $400 for home office or other expenses directly related to the performance of their employment duties, it may be possible to deduct these costs.
This may also provide an attractive alternative to managing the logistics associated with completing Form T2200.
Have you thought about prescribed rate loans?
Given the difficulty and complexity of dealing with the rules around the tax on split income, many taxpayers are considering the use of a prescribed rate loan to split income with family members who are subject to a lower marginal rate. For loans made after June 30, 2020, the prescribed rate is 1%, for as long as the loan remains outstanding, even if the prescribed rate increases in the future.
If you would like to pursue this type of planning, be mindful of the timing and form of interest payments to avoid the income attribution rules.