DECEMBER 31st – LAST CHANCE FOR 2012 YEAR-END TAX PLANNING - MNP’s tips to keep more money in your pocket
(December 18, 2012)----It’s that time of year again… when individuals and business owners start thinking about income tax planning. And while tax planning should take place throughout the year, December 31stgenerally marks the last date for transactions that can affect your 2012 taxes.
“With the holidays just around the corner, tax planning can sometimes take a backseat to other matters,” says Don Carson, Greater Toronto Area Tax Leader for MNP LLP. “By planning now and reviewing our checklist of tax planning tips, you can easily track what you need to do in order to minimize the shock at tax time and possibly have more money to spend in 2013.”
Owner-Managers
Salary vs. dividends? - Consider the following when determining the optimal salary and dividend mix:
- cash flow needs of owner-manager
- marginal tax rate of owner-manager (federal and provincial), especially in Ontario and Quebec where top marginal tax rates are scheduled to increase for 2013 and subsequently
- corporate tax rate (federal and provincial)
- other income of owner-manager (dividends may create alternative minimum tax liability)
Income splitting opportunities - Consider paying dividends to family member shareholders or reasonable salaries to family members that were employed in the business, especially if these family members do not have other significant sources of income.
Qualifying small business corporation share (QSBC) status - Planning to take advantage of your lifetime personal capital gains exemption in the near future? Be aware that accumulating excess cash or passive investments in the corporation puts the QSBC status of your shares at risk, as all or a substantial portion of the assets must be used in an active business carried on in Canada. It may be worthwhile to pay out bonuses and dividends now instead of later.
Small business deduction - If taking advantage of the small business deduction, consider whether strategies for “bonusing down” to the $500,000 SBD limit ($400,000 in Manitoba) make sense given the significant tax deferral available by having the income taxed corporately and redeployed in the business.
Installment and final tax balance payments - Already keeping up with your quarterly or monthly installment payments? Great! Remember that the balance of your expected corporate tax liability is required to be paid two or three months after the end of the tax year. Not sure when the final balance is due? Contact us to find out.
Joint venture stub period income inclusions - If your corporation is a participant in a joint venture that has a different year-end from your corporation, the corporation is required to include your share of income from the joint venture based on your corporation’s tax year.
Partnership stub period accrual - If your corporation (professional corporations excluded) is a partner in a partnership that has a different year-end from your corporation, the corporation is required to include an estimate of its share of partnership income in the corporate tax return for the “stub” period between the start of year of the partnership and the corporation’s year-end. This stub period accrual is generally based on the proration of actual income of the partnership for its previous taxation period.
Partnership filing requirements - Effective January 1, 2011, new filing requirements were introduced for partnerships. A partnership carrying on business in Canada or a Canadian partnership with Canadian or foreign operations or investments is required to file a T5013 Statement of Partnership Income for a fiscal period if:
- At the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets
- The partnership is a tiered partnership at any time in the fiscal period
- The partnership has a corporation or trust as a partner
- The partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership
- The Minister of National Revenue requests one in writing
Persons holding an interest in a partnership as a nominee or agent for another person are also subject to Statement of Partnership Income filing requirements (less detailed than for other partnerships)
Shareholder loans - Did you borrow from your corporation? Repaying the loan by the end of the year following the corporation’s tax year in which the loan was made will generally avoid certain negative tax consequences (with some exceptions). If you have debts owing to your corporation, contact a MNP advisor to determine the tax consequences of the outstanding debts.
Payments made after the year-end - Certain payments for accrued expenses in a taxation year must be made within a specified timeframe following the end of the taxation year in order for the expense to be deductible in that year’s tax return.
- Bonuses: within 180 days of year-end
- Employer contributions to pension plans: within 120 days of year-end
About MNP
MNP is one of the largest chartered accountancy and business consulting firms in Canada, providing client-focused accounting, taxation and consulting advice. National in scope and local in focus, MNP has proudly served individuals and public and private companies for more than 65 years. Through the development of strong relationships, MNP provides organizations with personalized strategies and a local perspective to help them succeed. For more information, visit www.MNP.ca.
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For more information, please contact:
Julie Bannerjea, Director, Integrated Marketing and Communications
MNP LLP – 416-263-6988 or julie.bannerjea@mnp.ca
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