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 2024 and even subsequent years. Here are five key strategies to consider when conducting year-end tax planning for your business.
Plan the timing of depreciable asset purchases
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. The benefit of timing your depreciable asset acquisitions is greater due to the temporary measures that allow for the full write-off or enhanced first-year CCA on eligible property.
The accelerated investment incentive property (AIIP) rules provide enhanced first-year CCA for eligible property acquired after Nov. 20, 2018, and available for use before 2028. For 2024 to 2027, the enhanced first-year allowance is generally two times the normal first-year CCA on property that is acquired and available for use in the year.
Similarly, for eligible clean energy equipment and manufacturing and processing machinery and equipment that are available for use after 2023 and before 2026, the enhanced first-year CCA is 75% and will be reduced to 55% for the subsequent two years.
The AIIP rules would be beneficial for capital property acquisitions that would not otherwise be eligible for full expensing under the other measures.
Purchases 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.
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. 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.
Understand the capital gains inclusion rate change and implications
For gains realized after June 24, 2024, the capital gains inclusion rate is proposed to increase from 50% to 67%. Although capital gains below the annual threshold of $250,000 will continue to be subject to a 50% inclusion rate, this exemption is only available to individuals, graduated rate estates (GREs), and qualified disability trusts (QDTs).
For a taxation year that includes June 25, 2024, transitional rules apply to separately identify capital gains and losses realized before June 25, 2024, and those realized after June 24, 2024, in order to determine the appropriate capital gains inclusion rate for this transition year. Where there are only net capital gains in both periods (or net capital losses in both periods), the proposed legislation provides a formula to calculate a blended capital gains inclusion rate and then applies that calculated rate to the total capital gains realized in the transition year. Where there is a net capital gain in one period and a net capital loss in the other period, the proposed legislation assigns an inclusion rate to use. For example, where the net capital gains in the first period exceed the net capital losses in the second period, the inclusion rate to use for the transition year is 50%.
There are additional transitional rules that affect the capital dividend account (CDA), including an adjustment that may be required at year-end to correct an overstated or understated CDA balance resulting from the use of a blended inclusion rate for this transition year.
As you may be aware, typical year-end planning often includes delaying the sale of assets with an accrued gain to delay the inclusion of income by one year and provide an additional year of CCA claim where the asset is depreciable property. On the flip side, it may be advantageous to sell assets with an accrued loss before the end of the year. However, as we’ve discussed, this transition year is not typical and can require the calculation of a blended capital gains inclusion rate. Whether these usual tax planning strategies would be beneficial this year would depend on various factors including the amount of gains/losses your company realized to date in each period.
In addition, given that individuals (and GREs and QDTs) have an annual $250,000 limit to access a lower 50% capital gains inclusion rate, you may be wondering whether you should withdraw funds from your corporation to invest personally. The proposed changes, including the transitional rules and implications, are complex. Contact a BDO tax advisor to assist with your tax planning.
Consider the clean technology investment tax credits
The government has introduced a suite of clean economy investment tax credits (ITCs) to help businesses adopt sustainable technologies, including:
These ITCs offer significant benefits for many businesses, from investments in clean energy such as solar panels, heat pumps or zero-emission industrial vehicles to larger investments by manufacturers and others who are investing in ways to make industrial processes greener. To understand how these new ITCs can benefit your business, refer to our dedicated webpage on Credits & Incentives.
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 2024 publication.
The tax on split income (TOSI) rules 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 income in a tax-efficient manner with family members. Where this is the case, you should know that the amount of eligible dividends that may be received tax-free has increased this year because of changes to the alternative minimum tax (AMT) rules.
The TOSI rules and changes to the AMT are complex, so it's important to work with your BDO tax advisor to determine an optimal remuneration strategy.
The 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 2024, remembering that salaries must be reasonable and commensurate with the services performed. A good guideline 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 2024 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 the fiscal year ending between July 6, 2024, and Dec. 31, 2024, a bonus for the 2024 fiscal year can be paid in 2025 (but within 179 days of the 2024 fiscal year end). This means that your business will get a deduction in the 2024 fiscal year, but your family members won't be taxed on their salaries until 2025.
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 2024, the remuneration and related withholdings must be reported on T4 slips for 2024, which are due on or before Feb. 28, 2025. The equivalent form to the T4 slip in Quebec is the RL-1 slip, which is also due on or before Feb. 28, 2025.
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 2024, 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.
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. This may be especially important given the proposed increase in the capital gains inclusion rate from 50% to 67% for gains realized after June 24, 2024.
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 before June 25, 2024, or 67% of the gains realized after June 24, 2024, on the sale of shares would be taxable, whereas investment income earned on bonds is fully taxable. This means that only 50% or 67% 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 Tax Q&A: Using corporate-owned life insurance to accumulate wealth article.
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 15, 2024.
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.