To get the most benefit from tax planning strategies, it is best to start before the end of the year. This will put your business in a much better position to manage income tax costs for 2023 and even subsequent years. Here are five key strategies to consider when conducting year-end tax planning for your business.
1. Plan the timing of depreciable asset purchases and sales
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. You should know that certain temporary measures allow for the full write-off or enhanced first-year CCA on eligible property that is acquired and available for use before the end of December 2023.
For unincorporated businesses carried on directly by Canadian resident individuals (other than trusts) and eligible partnerships with only individuals as partners, there is one additional year to benefit from the temporary immediate expensing rules (i.e., eligible property acquired on or after Jan. 1, 2022 may be eligible, provided they are available for use before 2025).
If you're planning to purchase depreciable assets for use in your corporation’s business in the near future, consider doing so before the end of your 2023 fiscal year to both maximize the benefit of the temporary rules and your current year CCA claim. If your fiscal year end is not Dec. 31, you can still take advantage of the immediate expensing program if qualifying assets are purchased and available for use prior to Dec. 31, 2023.
If you would like a refresher on the immediate expensing rules, read our article, Immediate expensing of certain depreciable property.
In addition to the immediate expensing rules, the accelerated investment incentive property (AIIP) rules are still available.
For eligible property acquired after Nov. 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. Generally, the enhanced first-year allowance is three times the normal first-year CCA on property that is acquired and available for use before 2024. For 2024 to 2027, the enhanced first-year allowance is reduced to two times the normal first-year CCA. This means that 2023 is also the last year to get the maximum benefit under the AIIP rules, further incentivizing the timing of depreciable property purchases before year end.
Similarly, eligible clean energy equipment and manufacturing and processing machinery and equipment that are available for use before 2024 can be fully written off in the first year. The enhanced first-year CCA is reduced to 75% for property that becomes available for use after 2023 and before 2026, and further reduced to 55% for the two years after.
The enhanced first-year CCA under the AIIP rules do not reduce the $1.5 million limit applicable under the immediate expensing rules. The AIIP rules would be beneficial for capital property acquisitions that fall in CCA classes that would not be eligible for immediate expensing, or where the $1.5 million limit is exceeded.
Purchases in 2023 of certain zero-emission vehicles, off-road zero-emission vehicles, and equipment are also eligible for enhanced first-year CCA, provided they become available for use before 2028. For eligible vehicles that are available for use before 2024, the rules allow for a full write-off in the first year. For 2024 to 2027, there is a phase-out of the enhanced deduction.
Keep in mind there is a limit of $61,000 (plus sales taxes) on the amount of CCA deductible for each zero-emission passenger vehicle acquired on or after Jan. 1, 2023 (previously, the limit was $59,000). 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 a full CCA write-off.
If you plan to sell capital assets with accrued gains, consider delaying the sale until 2024 (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.
2. Understand the Canada Emergency Business Account loan extension
The government recently extended the loan forgiveness repayment deadline for Canada Emergency Business Account (CEBA) loans from Dec. 31, 2023 to Jan. 18, 2024.
For CEBA loan holders who make a refinancing application with the providing financial institution by Jan. 18, 2024, the repayment deadline to qualify for partial loan forgiveness now includes a refinancing extension until March 28, 2024.
Repayment on or before the new deadline of Jan. 18, 2024 (or March 28, 2024, under the refinancing extension), will result in loan forgiveness of $10,000 for a $40,000 loan and $20,000 for a $60,000 loan.
Loans outstanding after Jan. 18, 2024 would be converted to term loans with a 5% interest rate, with the loans fully due by Dec. 31, 2026 (which was extended from Dec. 31, 2025).
While the forgivable portion of the loan would have been included in taxable income in the year the loan was received, if the loan is not repaid by the extended deadline, meaning that the conditions for a portion of the loan to be forgiven are not met, a tax deduction will be available when the loan is repaid.
3. Be prepared to meet new annual reporting obligations
In recent years, many businesses have experienced an increase in tax compliance obligations. To avoid costly penalties, it’s advisable to plan resources well ahead of time to ensure deadlines can be met.
The new trust reporting rules require many trusts to file an annual T3 trust return, including trusts that were not previously required to do so, for taxation years ending on or after Dec. 31, 2023. In addition, affected trusts will be subject to enhanced reporting requirements, such as providing information on trustees, beneficiaries, settlors, and any person who has the ability to exert control or override trustee decisions over the appointment of income or capital of the trust.
Importantly, the new requirements also apply to express trusts and bare trusts. It would be necessary for corporations to verify whether they are holding any property in trust for another party and could be caught under the new rules. In certain situations, the new reporting obligations can be onerous and non-compliance penalties can be significant.
For more background information on the changes, read our article, New trust reporting requirements are coming.
The UHT is an annual 1% tax on the ownership of vacant or underused housing in Canada that generally applies to owners who are not Canadian residents or permanent residents. However, certain Canadian taxpayers, including Canadian corporations, partners of Canadian partnerships, and Canadian trusts that own residential property in Canada will need to apply for an exemption from this tax in a UHT return, or face a penalty for failure to file. Read our article, Underused Housing Tax program - Considerations for Canadian corporations, partnerships, and trusts for more details.
While you may be familiar with the UHT as it came into effect in 2022, affected taxpayers should be mindful that it is an annual obligation and should plan accordingly to meet the ongoing compliance obligations.
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 2023 publication.
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 tax rate 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 the 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.
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 2023, 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 2023 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, 2023 and Dec. 31, 2023, a bonus for the 2023 fiscal year can be paid in 2024 (but within 179 days of the 2023 fiscal year end). This means that your business will get a deduction in the 2023 fiscal year, but your family members won't be taxed on the salaries until 2024.
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 2023, the remuneration and related withholdings must be reported on T4 slips for 2023, which are due on or before Feb. 29, 2024. The equivalent form to the T4 slip in Quebec is the RL-1 slip, which is also due on or before Feb. 29, 2024.
5. Take stock of the small business deduction
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.
In 2023, the average combined corporate tax rate on income up to the small business limit is 12.2% or less in all jurisdictions—at least 12% points lower than the general corporate tax rates, and as much as 21% points lower depending on your jurisdiction. This allows for a significant tax deferral where active business income is retained in the company. As such, the SBD is one of the most common tax advantages available to CCPCs.
The small business limit is currently $500,000 federally, in all provinces and territories except for Saskatchewan (where the limit is $600,000). This business limit must be shared amongst corporations associated in a taxation year. In addition, the SBD is phase-out based on the greater of two restrictions: the taxable capital restriction and the passive investment income restriction.
The passive investment income rules also 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 incurred are reasonable.
When a CCPC’s taxable capital employed in Canada, together with the taxable capital of associated corporations, exceeds $10 million in the previous year, the SBD is reduced on a straight-line basis and is eliminated when taxable capital reaches $50 million for taxation years that begin on or after April 7, 2022 (previously, this upper limit was $15 million). For companies with a calendar year-end, the upper limit increase is effective starting with the 2023 taxation year.
Companies that could not previously access the SBD because their taxable capital exceeded the upper limit may now be able to obtain immediate tax savings and the benefit of tax deferral. Similarly, companies that had the SBD reduced because their taxable capital exceeded the lower limit may also benefit from this change, as the phase-out of the SBD on taxable capital in excess of $10 million and below $50 million will be more gradual.
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
The 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.
The information in this publication is current as of October 26, 2023.
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.