Top 5 year-end tax planning strategies for your business: 2022 edition

September 22, 2022

To get the most benefit from tax planning strategies, you should start well before the end of the year. This will put your business in a much better position to manage income tax costs for 2022 and even subsequent years. Here are five key strategies to consider when conducting year-end tax planning for your business in 2022.

1. Understand the tax implications of the government’s COVID-19 relief programs

Wage and rent subsidies

While many government pandemic relief programs have come to an end, assistance received under programs, such as the Canada Recovery Hiring Program, Tourism and Hospitality Recovery Program, and Hardest-Hit Business Recovery Program, is taxable as income and is considered to be received on the last day of the qualifying period to which it relates.

If this applies to your business in 2022, you should consider the impact on your business's cash flow as you prepare to make final tax payments.

Small Business Air Quality Improvement Tax Credit

The new temporary Air Quality Improvement Tax Credit is a refundable credit of 25% of qualifying expenditures, up to a maximum of $10,000 per location and $50,000 for all locations, made between September 1, 2021, and December 31, 2022. The credit may be claimed by a Canadian-controlled private corporation (CCPC) with taxable capital employed in Canada on an associated group basis of $15 million or less, an individual (other than a trust), or a partnership.

If your business is considering investing in better ventilation and air filtration, keep in mind that this credit is only available until the end of the year. And if you do take advantage of this credit, the amount received is considered government assistance and is generally included in income in the taxation year in which it is received (i.e., in this case, the taxation year in which the credit is claimed).

CEBA loans

Where a Canada Emergency Business Account (CEBA) loan was received, you are likely aware that the government extended the loan forgiveness repayment deadline from December 31, 2022, to December 31, 2023.

While the forgivable portion 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, you should know that a tax deduction would be available at that time.

For more information, read our article: Government increases loans available under the Canada Emergency Business Account (CEBA).

CRA audits

There is always the possibility that your claims may be audited by the Canada Revenue Agency (CRA). Since late 2021, the CRA has been actively auditing wage subsidy claims. Ensure that documents supporting your claims are kept and readily available in the event they are requested by the CRA.

For more information, read our article: Are you ready for a CRA audit of your business’s CEWS claims?

2. Plan the timing of depreciable asset purchases and sales

Immediate expensing of eligible investments

Canadian-controlled private corporations (CCPCs), unincorporated businesses carried on directly by Canadian resident individuals (other than trusts), and certain eligible partnerships may immediately expense up to $1.5 million of eligible property in each year starting from 2021 for CCPCs and from 2022 for other eligible taxpayers.

The $1.5 million limit must be shared among members of an associated group of eligible persons or partnerships. 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 carry forward 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 available for use in the current fiscal year in order to claim CCA this year.

If you acquire eligible property in excess of the $1.5 million limit, you may choose to immediately expense eligible property in classes with the lowest CCA rate. We discuss other planning points to consider in our article, Immediate expensing of certain depreciable property.

Accelerated investment incentive property rules

In addition to the immediate expensing rules, 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 enhanced first year CCA under the AIIP rules would not reduce the $1.5 million limit applicable under the immediate expensing rules and 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.

Zero-emission vehicles

Purchases of certain zero-emission vehicles and off-road zero-emission vehicles as well as 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 a full write-off in the first year.

Keep in mind there is a limit of $59,000 (plus sales taxes) on the amount of CCA deductible for each zero-emission passenger vehicle acquired on or after January 1, 2022 (previously, the limit was $55,000). 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.

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 2023 (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

In 2020 and 2021, eligible employees who worked from home because of the COVID-19 pandemic had the option to choose between two methods of claiming a home office expense deduction: the detailed method and a temporary flat-rate 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 flat-rate 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 eligibility requirements to use these methods remain the same for 2022.

If your employees worked from home in 2022 due to COVID-19, plan to prepare the traditional Form T2200 or the simplified Form T2200S for them.

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 more details and a summary of tax rates, refer to our accompanying article and Tax facts 2022 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 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.

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 2022, 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 2022 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, 2022 and December 31, 2022, a bonus for the 2022 fiscal year can be paid in 2023 (but within 179 days of the 2022 fiscal year end). This means that your business will get a deduction in the 2022 fiscal year, but your family members won't be taxed on it until 2023.

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 2022, the remuneration and related withholdings must be reported on T4 slips for 2022, which are due on or before February 28, 2023. The equivalent form to the T4 slip in Quebec is the RL-1 slip, which is also due on or before February 28, 2023.

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 2022, 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, and 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.

How taxable capital restricts the small business deduction

When the taxable capital employed in Canada of a CCPC, together with the taxable capital of associated corporations, in the previous year exceeds $10 million, the SBD is reduced on a straight-line basis and is eliminated when taxable capital reaches $15 million. Changes have been proposed to increase the upper limit of the taxable capital from $15 million to $50 million for taxation years that begin on or after April 7, 2022. For companies with a calendar year end, the change will be 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 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 $15 million will be more gradual.

For more information, read our article, Federal Budget 2022 proposes enhancement to small business deduction for CCPCs, and contact a BDO tax professional to help you assess how this change may affect your business going forward and whether you are eligible to access the associated benefit.

How passive investment income rules restrict small business deduction

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 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.

Need to improve your tax planning strategies? We're here to help

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, Managing Partner, Tax

Greg London, Partner, Tax


The information in this publication is current as of September 22, 2022.

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.

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