The following year-end tax planning guide is geared towards business owners and employers and outlines various programs and tax tips that should be considered in order to save tax.
COVID-19 Relief Programs
Temporary Wage Subsidy (TWS)
The Temporary Wage Subsidy (TWS) program provides eligible businesses with a subsidy equal to 10% of the remuneration paid to employees between March 18, 2020, and June 19, 2020, with a maximum of $1,375 per employee and $25,000 in total. If you are eligible for TWS but did not reduce your payroll remittances, you can still apply and the CRA will pay the amount of the subsidy to you or transfer it to your next year’s payroll remittance.
Canada Emergency Wage Subsidy (CEWS)
Under the Canada Emergency Wage Subsidy (CEWS) program, you may be able to receive a subsidy of up to 85% of eligible remuneration that you paid between March 15 and December 19, 2020, if you had a decrease in revenue. The deadline to submit an application for the Canada Emergency Wage Subsidy (CEWS) is January 31, 2021.
Capital Dividend Account
If your company has unrealized losses in its investment portfolio, it is worth checking to see if your company’s capital dividend account (“CDA”) has a positive balance before engaging in any activities to sell the investment portfolio to trigger the capital loss. Net capital losses will decrease the CDA. Therefore, prior to realizing any capital losses, consider paying out any capital dividends to eliminate any positive balance in the CDA.
Business Transition Planning
You may be thinking about transitioning your business to new owners. If you believe that the value of your business has recently dropped in value, now may be a good time to consider various planning options.
Gift of shares and Sale of shares
Two of the most common transition plans a business owner can consider when looking to transition their business to the next generation are a gift of shares or the sale of shares. For tax purposes, both options are treated in the same fashion, but their outcomes may differ a bit. For instance, a transition plan involving the gifting of shares doesn’t require the individual(s) receiving the shares to pay any funds to acquire them. For tax purposes, the person making the gift is deemed to have sold their shares at fair market value (FMV). If the FMV of the shares exceeds its ACB, there will be a taxable capital gain. If the transferor has not previously used all, or a portion of, their lifetime capital gains exemption, the resulting tax liability can potentially be reduced.
Sell the shares is another common transition plan. If the value of your business has dropped and you are satisfied with the lower valuation on the proceeds earned from a sale, this could be an opportune time to sell to family members. However, if you are tempted to sell the shares to family members at a price less than their FMV, double taxation may arise. As a result, you will still be treated as if you received proceeds equal to the FMV. But, for the family members who receive the shares, their new ACB will be limited to the price they paid.
Estate Freeze and Refreeze
An estate freeze is a reorganization of the shares of a private company to allow you undertaken to “freeze” the value of your ownership in the corporation, and have the future growth in the value of the company accrue to new shareholders, such as your next generation. An estate refreeze is a reorganization that involves implementing a new estate freeze for one’s company at the new (lower) current FMV of the business. By properly structuring the refreeze, one will have reset the estate tax liability for the freezor at the lower valuation, and thus will allow for more future growth to tax-efficiently transfer to the next generation.
The tax liability can be fixed at today’s FMV and the tax liability on any future growth can be transferred to the new shareholders. A freeze can generally be done on a tax-deferred basis, leaving your tax bill to a later date. It may be a good time to consider an estate freeze or a refreeze if you believe that the value of your business is currently at a low point, or the growth potential is high and/or you want to accomplish one or more of the objectives referred to above.
The lifetime capital gains exemption (LCGE)
Qualified small business corporation (QSBC) shares are shares of a Canadian-controlled private corporation (CCPC) in which “all or substantially all” (interpreted to mean 90% or more) of the value of the corporation’s assets is used in an active business in Canada at the date of sale or transfer. An individual who owns shares in a QSBC may be able to claim the LCGE (up to $883,384) when those shares are sold. The actual capital gains deduction is 50% of the LCGE.
There are tests to determine the qualification of QSBC when those shares are sold. To meet the tests, owners often “purify” their CCPC in advance of shares sell, to remove passive assets that could put the corporation offside of the active business. This purification strategy could be useful even if you are not considering the disposition of your business in the short term.
When an individual receives a dividend or interest income from a company or realized a capital gain, and a related individual is either actively engaged in the business of the company or owns a significant amount of equity (with at least 10% of the value) in the company, those dividends or interest income are taxed at the highest marginal rate.
If your company has shareholders such as your spouse, partner, children or other relatives, you should review the tax on split income (TOSI) rules that may apply before paying dividends to these individuals in 2020.
If you have questions regarding this post, please contact a member of the EPR Maple Ridge Langley team at firstname.lastname@example.org.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. EPR Maple Ridge Langley, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.