Year-end tax check up can find funds for your franchise
By Ken Karakashian, BDO Dunwoody LLP
Canadian Business Franchise
Published Nov/Dec 2004
With only a few weeks to go before the end of 2004, many franchise owners are already contemplating their plans for 2005. But before you focus your attention on the new year, do a year-end check up to determine whether you are optimizing tax–saving opportunities. Implemented before December 31, the following strategies could provide you and your franchise with a significant financial advantage to launch your plans for 2005.
The calendar year represents an important timeline for business owners. Owners of unincorporated businesses are taxed on a calendar year basis, so December 31 is the last date for most transactions affecting your 2004 taxes. As well, many incorporated businesses have December 31 year-ends – or others close to this date. These few weeks therefore offer a window of opportunity for owners of both incorporated and unincorporated franchises to start 2005 with some “found” funds. Use the following checklist as a guide to determine how you can pay less tax in 2004.
Owners of unincorporated or incorporated franchises
Pay salaries to family members
Hire your spouse or children to work in your business and begin paying them salaries this year. These salaries reduce your business income and provide family members with earned income for RRSP contributions.
Accelerate business expenditures and capital asset purchases
If you anticipate certain business expenditures, make your purchases now in order to deduct them for 2004. Also, if you plan to purchase capital assets, such as equipment or vehicles, in the near future, do so before year-end. When you acquire and use these assets in 2004, you can claim one-half of the relevant capital cost allowance (CCA) rate. Even if you're in a loss position this year, purchasing the asset now will allow a full year's CCA claim next year.
Conversely, if you plan to dispose of capital assets, delay the sale until after December 31 so that you will still be able to claim CCA on the assets in 2004.
Donate to charity
Make charitable donations by December 31 in order to receive a tax credit for 2004.
Pay for medical expenses
If you anticipate that you will soon have significant medical expenses, such as a dental procedure, time the procedure and pay the expenses before December 31. This will enable you to claim these expenses for 2004.
Owners of incorporated franchises
Establish optimum salary/dividend mix
If you withdrew funds from your corporation during the year for personal use, determine what amounts should be classified as salary or dividends in order to achieve the best tax results. Generally, if your company’s taxable income is below $250,000, dividends will save you tax. However, you should have a salary of at least $92,000 in order to contribute the maximum amount of $16,500 to your RRSP ($15,500 for 2004).
Consult with your accountant as to the best course of action -- but do so before December 31, otherwise, the funds could be considered a shareholder loan. This would deny you the benefit of the dividend tax credit; the loan would not be deductible to the corporation as salary; and it would not be counted as earned income, which determines your allowable RRSP contribution.
Pay dividends from your corporation
If your spouse or your children (18 years of age or older) purchase shares of your corporation at fair market value with their own funds, they can receive dividends from the corporation out of its after-tax profits. This allows you to split income.
Moreover, dividends paid by the corporation before its year-end could generate a refund on the corporate tax return, if it has earned investment income on which it paid tax. Therefore, if your corporation has a year-end early in 2005, such as January 31, you could declare a dividend in January, which would generate a tax refund for the corporation on its current return. The recipients of the dividend would only be taxable on their 2005 returns, which are due by April 30, 2006.
Repay a corporate loan
If you borrowed money from your corporation last year, repay the loan by December 31; otherwise the loan must be included in your income and you will have to pay personal tax on the funds.
Pay interest on shareholder loans
If you paid yourself sufficient salary to maximize your RRSP and your family's child care deduction claim, and your corporation still has more than $250,000 of active business income, charge interest on any loans you've made to the company. The interest would be deductible to the corporation and the payment to you would not be subject to provincial payroll taxes.
Pay any tax balances owning
Pay any balances or instalments owing for income tax or capital tax -- even if you have to borrow the money. Otherwise, you will have to pay high interest rates or penalties on these amounts. The effective interest rate the government charges is usually much higher than the rate you would pay on a bank loan – and it’s not tax deductible.
Purchase an older automobile from your corporation
If you have a corporate-owned vehicle that you drive for personal use and it’s a few years old, you may want to purchase it this year at fair market value. The standby charge benefit included in your income is based on the original cost of the automobile, no matter how old it is. Buying the older vehicle now will ensure that you won't be taxed on a large auto benefit next year.
These are only a few of the tax strategies that can help your franchise begin the new year on a solid financial foundation. Discuss with your accountant which of these options are best for your situation – and then celebrate the new year with some the dollars you’ve saved!
Ken Karakashian, CA, is a partner of BDO Dunwoody LLP (www.bdo.ca). BDO is one of Canada’s leading accounting and advisory firms, which helps entrepreneurs, family businesses, franchisors and franchisees succeed. If you have questions about this article or you would like to receive BDO’s “Tax Factor” newsletter, contact Ken in the Mississauga, Ontario office at (905) 270-7700 or kkarakashian@bdo.ca.
