Tax Articles
Tax Planning for Tough Times
Kais Aziz
Plant
September 2009
During times like these, no one wants to pay any more corporate tax than is absolutely necessary. Consider the following possibilities to reduce or defer taxes.
Carry capital losses forward
If your corporation paid a dividend in the previous three years and the corporation has already received the refundable tax associated with these gains, it may be worthwhile to carry capital losses forward to apply against future gains rather than carrying these losses back to a prior year.
Pay dividends from your corporation
Since future capital losses could reduce the amount that can be paid as a capital dividend, if your corporation has had capital gains in the past or received life insurance proceeds, consider paying a tax-free capital dividend before triggering capital losses. Also, if your corporation has refundable dividend tax on hand, you may be able to pay a dividend to trigger a refund of this tax.
Utilize corporate group losses
If you have more than one corporation and have income in one entity and losses in another, or you have property with an accrued gain in one corporation and property with an accrued loss in another, you may be able to utilize the losses in one of the following ways:
- Merge the corporations so that income and losses or capital gains and capital losses are offset directly.
- Subject to reasonability, adjust inter-corporate charges to increase income for a corporation with unapplied losses.
- Prior to selling property with an accrued gain, transfer it to a corporation with unapplied losses to allow the corporation to use the losses to offset the gain.
- Provide an interest-free loan to a corporation with losses to enhance its ability to generate income.
Establish a holding company
Holding companies can provide a number of tax benefits in situations such as the following.
- Pay out the corporate earnings of a subsidiary corporation as a tax-free inter-corporate dividend and provide asset protection to the operating company.
- If you purchased shares of a corporation, and your tax cost is higher than the paid-up capital of the shares, you may be able to transfer your shares to a holding company in return for debt or paid-up capital, which can be repaid tax-free.
- A holding company can provide protection from business risk for tangible property such as land or buildings, even if it is being used by a subsidiary of the business. Provided that certain conditions are met, the holding company shares will still be eligible for the capital gains exemption.
- A corporation can pay the balance in its general rate income pool (GRIP) to a parent company as an eligible dividend in order to protect that balance from future losses. Under the dividend taxation rules, a private company can pay eligible dividends, which are taxed at a lower rate, to the extent the corporation has a positive balance in its GRIP at year-end. If a corporation has losses in the future, this GRIP balance could be eroded.
Reduce corporate income tax instalment payments
If your corporate income will be lower this year, and therefore also your taxes payable, you can estimate and pay instalments based on the current year rather than using the calculation from the previous year.
Adjust remuneration
If corporate income is lower than last year, adjust salary/dividend remuneration to minimize taxes on distributions from your corporation. Revisit income splitting strategies at the same time to reduce your family’s taxes payable. It may be possible, for example, to pay dividends to adult family members and attract little or no tax.
Evaluate potential for research and development tax benefits
Many Canadian companies are eligible for tax benefits when they produce new or improved products or processes. Businesses that qualify for the scientific research and experimental development (SR&ED) program offered by the federal and provincial/territorial governments can deduct 100% of all eligible current and capital expenditures. As well, they can receive investment tax credits of 20% or 35%, depending upon a company’s level of taxable income and capital. In many cases, these credits are refundable.
If you’re not sure whether your company’s activities qualify, consult with an SR&ED specialist who can determine whether work being performed may be eligible for this program, or even structure activities so they do qualify.
When times are tough and every dollar counts, it’s time to put tax planning to work.
Kais Aziz is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps businesses succeed. You can reach Kais in the Mississauga office at (905) 270-7700 or kaziz@bdo.ca.
