Amid the on-going challenges of the pandemic, tax planning may not be top of mind for many business owners, but it's more important than ever to plan ahead for income taxes to avoid any unpleasant surprises later on.
Here are five key strategies to consider when conducting year-end tax planning for your business in 2021.
1. Consider government COVID-19 relief programs
While the last claim period for the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) ended on October 23, 2021, there are other pandemic relief programs that your business may benefit from.
Canada Recovery Hiring Program
The government has announced an extension to the Canada Recovery Hiring Program (CRHP) to May 7, 2022. For eligible entities that continue to experience a decline in revenues compared to pre-pandemic levels, the CRHP provides wage support to assist in the hiring of new staff or the increasing of wages to existing staff. To learn more, read our article, How the Canada Recovery Hiring Program Supports Jobs and Growth.Remember: applications for the CEWS, CERS, and CRHP must be filed no later than 180 days after the end of the claim period.
Tourism and Hospitality Recovery Program
If you operate in the tourism and hospitality industries, the government has announced the new Tourism and Hospitality Recovery Program, which would provide wage and rent support of up to 75% to hotels, restaurants, tour operators, travel agencies, and others. To qualify for this new program, eligible organizations must meet two conditions:
- an average monthly revenue reduction of at least 40% over the first 13 qualifying periods for the CEWS (also referred to as the 12-month revenue decline); and
- a current month revenue loss of at least 40%.
The government has indicated that this new program would be available from October 24, 2021 to May 7, 2022.
Hardest-Hit Business Recovery Program
In addition, the government has announced a new Hardest-Hit Business Recovery Program, which would provide rent and wage support of up to 50% for eligible entities. To qualify for this new program, eligible entities must meet two conditions:
- an average monthly revenue reduction of at least 50% over the first 13 qualifying periods for the CEWS (also referred to as the 12-month revenue decline); and
- a current month revenue loss of at least 50%.
This new program would also be available from October 24, 2021 to May 7, 2022.
Support across all sectors in the event of a public health lockdown
Regardless of sector, organizations subject to a qualifying public health restriction would be eligible for support at the same subsidy rates calculated in the Tourism and Hospitality Recovery Program.
Organizations would qualify if they have one or more locations subject to a public health restriction of at least seven days in a claim period that requires the cessation of activities that account for at least 25% of total revenues during the prior reference period. Such organizations must meet the current month revenue decline test, but not the 12-month revenue decline test.
A proposed refundable tax credit for small businesses
The government's election platform included a plan to introduce a refundable tax credit for small businesses to claim 25% of eligible ventilation improvement expenses of up to $10,000 per building location, to a maximum of $50,000 per entity. The government previously indicated that this credit would be available from September 1, 2021 to December 31, 2022; however, legislation has not been provided.
What's included as taxable income?
Assistance received under government assistance programs, such as the CEWS, CERS, and CRHP, is taxable as income and is considered to be received on the last day of the qualifying period to which it relates. Similarly, the forgivable portion of the Canada Emergency Business Account (CEBA) loan also needs to be included in taxable income in the year the loan is received. Keeping these points in mind can help you manage your business's cash flow as you prepare to make final tax payments.
In addition, there is always the possibility that your claims may be audited by the Canada Revenue Agency (CRA). Ensure that documents supporting your claims are kept and readily available in the event they are requested by the CRA.
2. Plan the timing of depreciable asset purchases and sales
Immediate expensing of eligible investments
The government has confirmed it will move forward with a plan to allow Canadian-controlled private corporations (CCPCs) to immediately expense up to $1.5 million of eligible property in each year from 2021 to 2023. Eligible property generally includes all depreciable capital property, other than longer-term investments such as buildings and certain structures, and unlimited life intangibles including goodwill.
If you're planning to purchase depreciable assets for use in your business in the near future, consider doing so before the end of your fiscal year to maximize the benefit of the annual $1.5 million limit, as no carryforward is available. As long as eligible assets are acquired and in use before your fiscal year-end, you can claim capital cost allowance (CCA) to reduce your business's income in this fiscal 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 in order to claim CCA this year.
We discuss other planning points to consider in our article, CCPCs Can Immediately Expense Certain Depreciable Property. However, note that legislation has not yet been introduced and the CRA will not allow the proposed deduction on tax returns. If you need to file a tax return for your business before legislation is introduced, you should be able to file an amended return afterwards to take advantage of the deduction once it will be accepted by the CRA.
Accelerated investment incentive property rules
In addition to the proposed measure on immediate expensing, the accelerated investment incentive property (AIIP) rules are available. For eligible property acquired after November 20, 2018 and available for use before 2028, the AIIP rules provide for enhanced first-year CCA, with the highest rate of CCA available to property that is available for use before 2024.
Under these rules, eligible manufacturing and processing machinery and equipment, as well as clean energy equipment, that are available for use before 2024 can be fully written off in the first year. Other classes of eligible depreciable property can benefit from an enhanced first-year CCA claim equal to three times the first-year CCA that could be claimed prior to the introduction of the AIIP rules.
The government has indicated that the enhanced first-year CCA under the AIIP rules would not reduce the $1.5 million limit under the proposed immediate expensing measure.
Purchases of certain zero-emission vehicles and off-road zero-emission vehicles and equipment made during the year that become available for use before 2028 are also eligible for enhanced first-year CCA. For eligible vehicles that are available for use before 2024, the rules allow for full write-off in the first year.
Keep in mind there is a limit of $55,000 (plus sales taxes) on the amount of CCA deductible for each zero-emission passenger vehicle. In addition, if you took advantage of the federal point-of-sale incentive for zero-emission vehicles administered by Transport Canada, your new vehicle would not be eligible for full CCA write-off.
Accelerating the purchase of capital assets before the end of your fiscal year and claiming the enhanced first-year CCA on eligible property will allow for faster tax write-off of these investments, provided that the assets will also be available for use prior to your fiscal year end.
Delay the sale of assets with accrued gains until after year end
If you plan to sell capital assets with accrued gains, consider delaying the sale until 2022 (or the start of your business's next fiscal year). This will allow your business to claim one additional year of CCA and will also postpone the inclusion of any recaptured CCA and capital gains in taxable income by one year. Note that this planning applies to depreciable property, real property that is capital property, and investments.
3. Be prepared to provide employees with Form T2200/T2200S
Last year, employees who were required to work from home may have been eligible to choose between two methods of claiming a home office expense deduction: the detailed method and a temporary simplified method that was introduced in response to the pandemic. While a signed form from the employer was not required for employees to use the temporary simplified method, a signed Form T2200, Declaration of Conditions of Employment, or T2200S, Declaration of Conditions of Employment for Working at home Due to COVID-19, was required in order to use the detailed method.
The government has indicated that eligible employees who continue to work from home during the pandemic will be able to use the simplified method for an additional two years—they have also promised to increase the maximum deductible amount from $400 to $500. This is good news for many employees who worked from home during 2021 as a result of the pandemic.
There has also been a shift in many industries to hybrid work arrangements, where employees are not necessarily required to work remotely but have the choice to do so. This trend may continue well into the foreseeable future and has raised questions regarding whether employees who choose to work from home would be eligible to claim a home office expense deduction under the two methods. The government has not yet responded to these issues.
If your employees worked from home in 2021, watch for government announcements on this matter and plan to prepare the traditional Form T2200 or the simplified Form T2200S for your employees. Note that Form T2200S was designed for use only in 2020 and depending on CRA updates, a new version of the form may be released for 2021.
4. Pay your family wisely
As a private business owner, you likely know the value of revisiting your family business remuneration strategy at least annually. In determining the best mix of salaries and dividends for you and your family members, consider factors such as each individual's marginal tax rate and need for cash, as well as the corporation's tax rate and the benefits of tax deferral. For a summary of tax rates, refer to our Tax Facts 2021 publication. publication.
Tax on split income rules
Since 2018, this process has become more complex due to the expansion of the tax on split income (TOSI) rules. These rules further restrict the use of a private corporation to split income with family members. They do this by applying a high rate of tax to certain types of income—in particular, dividends paid from private corporations. When these rules apply, they eliminate the benefit of income splitting.
However, there are situations where you can still split income in a tax-efficient manner with family members. The TOSI rules are very complex, so it's important to work with your trusted BDO tax advisor to determine an optimal remuneration strategy.
Pay reasonable salaries to family members
TOSI rules don't apply to wages paid for actual work performed. If your spouse or children work for your business, consider paying them salaries for their work in 2021, remembering that salaries must be reasonable and commensurate with the services performed. A good rule of thumb is to pay them what you would have paid a third party and to maintain adequate documentation to support such payments.
Also, remember that payment of salaries and bonuses accrued in your 2021 fiscal year must be made within 179 days of your business's year end for the amounts to be deductible in the current fiscal year. For fiscal year ends between July 6, 2021 and December 31, 2021, a bonus for the 2021 fiscal year can be paid in 2022 (but within 179 days of the 2021 fiscal year end). This means that your business will get a deduction in the 2021 fiscal year, but your family members won't be taxed on it until 2022.
Withholdings on family salaries
Whenever you pay salaries to your spouse or children, ensure that withholdings for income tax, Canada/Quebec Pension Plan, employment insurance/Quebec Parental Insurance Rates (where an exemption is not available), and any applicable provincial payroll taxes are remitted as required.
Where the remuneration is paid in 2021, the remuneration and related withholdings must be reported on T4 slips for 2021, which are due on or before February 28, 2022. The equivalent form to the T4 slip in Quebec is the RL-1 slip, which is also due on or before February 28, 2022.
5. Take stock of the small business deduction and the passive investment income rules—and their impact on your business
The small business deduction (SBD) reduces the corporate tax rate for qualifying businesses and therefore creates a greater deferral of tax than for business income taxed at the general corporate rate. As such, the SBD is one of the most common tax advantages available to CCPCs.
The small business limit is currently $500,000 federally, and in all provinces and territories except for Saskatchewan (where the limit is $600,000). In 2021, the average combined corporate tax rate on income up to the small business limit is 12.4% or less in all jurisdictions—at least 12 percentage points lower than the general corporate tax rates, and as much as 20 percentage points lower depending on your jurisdiction. This allows for a significant tax deferral where active business income is retained in the company.
How passive investment income rules restrict small business deduction
The passive investment income rules limit access to the SBD. Specifically, CCPCs that earned investment income over a $50,000 threshold in the previous year are generally subject to a reduction in the amount of SBD that can be claimed for the current year.
Under the rules, the small business limit is reduced by $5 for every $1 of adjusted aggregate investment income (AAII) above the $50,000 threshold. Under this formula, the SBD will be eliminated when AAII reaches $150,000 in a given taxation year. Note that investment income is aggregated for all associated corporations for purposes of this threshold.
Generally, AAII includes investment income, such as interest, rent, royalties, portfolio dividends, dividends from foreign corporations that are not foreign affiliates, and taxable capital gains in excess of current-year allowable capital losses from the disposition of passive investments. Since AAII includes income net of expenses, it might make sense to consider the related expenses that were incurred to earn investment income. For example, interest expense, investment counsel fees, and a salary paid to the owner-manager incurred to earn investment income could reduce AAII, as long as the amounts are reasonable.
Ways to preserve access to the small business deduction
Because the SBD restriction is based on AAII earned in the previous year, annual planning may make sense in situations where the amount of AAII changes from year to year so that the following year's SBD can be managed. There are strategies to reduce investment income within your corporation while retaining investment funds within the company (as withdrawing the funds from the company will be taxable to you). Keep in mind that any such action to reduce investment income must make sense from an overall investment perspective and not just with a view to tax minimization.
1. Adjust your investment mix
For example, you could adjust the investment portfolio in your company to be more tax efficient. One way to achieve this might be to hold more equity investments within your corporation rather than fixed income investments. This would be helpful because only 50% of the gains realized on the sale of shares would be taxable, whereas investment income earned on bonds is fully taxable. This means that only 50% of the gain on the sale of equities is included in AAII compared to 100% of the income earned on fixed-income investments.
2. Invest in an exempt life insurance policy
As an alternative, you could also consider investing excess funds in an exempt life insurance policy, because the investment income earned is not included in AAII. To learn more, read our article, Tax Q&A: Using Corporate-Owned Life Insurance to Accumulate Wealth.
3. Set up an individual pension plan
Passive investment rules don't apply to individual pension plans (IPPs), which makes them an attractive retirement savings option for business owners.
An IPP is a defined benefit pension plan available to owners of incorporated businesses. Under an IPP, the benefits are set by reference to your salary, and contributions are made to build sufficient capital to fund a defined pension benefit. The contributions made by your company are tax deductible, and the investments inside the plan grow on a tax-deferred basis.
For eligible individuals, the use of an IPP can allow for greater contributions (which generally grow with age) when compared to a registered retirement savings plan (RRSP). Over time, the use of an IPP can produce substantial tax advantages over an RRSP. Additional benefits of an IPP may include the ability to make up for poor investment performance and higher retirement benefits.
You need to improve your tax planning strategies, we’re here
If you think that your business could benefit from any of these strategies, contact your local BDO office today. A trusted BDO advisor would be happy to assist you with your business's year-end planning.
Rachel Gervais, GTA Tax Service Line Leader
Greg London, Eastern Canada Tax Service Line Leader
Bruce Sprague, Western Canada Tax Service Line Leader
The information in this publication is current as of October 24, 2021.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.