Chartered Accountants of Ontario, Canada

 

2006 YEAR-END TAX PLANNING CHECKLIST

Owners-Managers

The following checklist provides tactics you should consider as part of your year-end tax planning. If you need further explanation, please contact Chaplin & Co., Chartered Accountants at 416 667 7060.

  • Installments:
    • Pay less frequent Ontario income and capital tax installments if your corporation qualifies.
    • Reduce Quebec income and capital tax installments in your corporation claims research and development tax credits and meets other eligibility criteria.
  • Final tax balances - Pay final corporate income and capital tax balances within two months after year end (three months for certain Canadian-Controlled private Corporations).
  • Salary/dividend mix - Determine the optimal salary/dividend mix for you and other family members for 2006.
  • Pay salary or bonus - other than dividends if the corporation’s combined Federal and Provincial rate exceeds 20% - generally when taxable income exceeds $300,000 ($400,000 for 2007)
    • If the individual’s tax rate is higher than the corporation’s, retain in the corporation income on which the corporation pays tax, to allow personal tax to be deferred.
  • Remuneration accruals - Accrue salary and bonuses before the year end of your business. Ensure that accrued amounts are paid within 180 days at the corporation’s year-end.
  • Employee gifts and awards - Consider the CRA’s revised policies when formulating an employee gift and award program.
  • Salaries to family members - Pay a reasonable salary to a lower-tax bracket spouse or child who provides services to your business.
  • Corporate withdrawals - Make tax-effective withdrawals of cash from your corporation (e.g., by paying dividends, non-taxable capital dividends, or a return of capital).
  • Depreciable assets - Accelerate purchase of depreciable assets.
  • Capital tax - Consider alternatives to reduce federal and provincial taxable capital.
  • Reserves - Identify and claim any additional reserves for doubtful accounts receivable or inventory obsolescence.
  • Dividends - Convert dividends to capital gains.
  • Dispositions - Defer planned dispositions that will result in income until after year end.
  • Costs of doing business - Compare costs of doing business in different jurisdictions.
  • Sales to related businesses - Ensure that goods sold to related businesses are resold to third parties before year end.
  • $500,000 capital gains election -
    • Ensure that the company qualifies as a qualified small business corporation.
    • Crystallize the capital gain now.
    • Consider taking steps to have your spouse or children share in future appreciation to use their $500,000 capital gains exemption.
    • Determine whether you have a cumulative net investment loss (CNIL) amount which will affect any capital gains exemption claim.
    • If you have already used your exemptions, consider transferring private company shares to your RRSP if a cash contribution is not practical.
  • Capital gains rollover - Investment proceeds on the sale of eligible small business investments in other eligible small business investments.
  • Inter-company charges - Ensure inter-company charges are reasonable given changes in the economy.
  • Donations - Make charitable donations and political donations before year-end.
  • Shareholder loans to your corporation - Have your corporation pay deductible interest on shareholder loans made to the corporation in order to reduce active business income to the $300,000 threshold. This threshold may be higher in some jurisdictions.
  • Shareholder loans from your corporation - Repay shareholder loans from your corporation no later than one tax year after the amount is borrowed (exceptions apply).
  • Fines and penalties - most government and court fines imposed after March 22, 2004 are not deductible.
  • Professionals and sole proprietorships -
    • Consider making election to retain your off-calendar year-end.
    • If your business is growing and the income increasing annually, the alternative method may provide some income tax deferral.
    • If you are operating a successful unincorporated business, consider whether incorporation of the business will provide additional commercial and tax benefits.
    • Review whether you should incorporate your professional business, if allowed by your licensing authority.