While the financial details for each corporation and objectives of the owner will be different, there are some similarities in planning for all Canadian-Controlled Private Corporations (CCPC). Here are six tips that can help advisors and clients with planning before year-end:

Bonuses payable. Both Generally Accepted Accounting Principles (GAAP) and the Income Tax Act allow for an accrual of a bonus payable on the financial statements and tax return if the bonus is in fact paid out within 179 days of the fiscal year-end. The desired result is that the owner-manager can use the money paid this year, but not have to report the income on the personal return until the following year, a 20-month deferral of personal income tax.

Losses on active business operations may be carried back three years or carried forward for 10 years if the loss occurred before 2005, and for 20 years if the loss occurred in 2006 and later. If losses are incurred in the current year, consider carrying them back to apply against taxable income in the prior three years. Conversely, losses incurred in any of the prior 10 years may be applied against income in the current year.

Capital Cost Allowance (CCA) is an optional deduction that can be applied against current year income; in the year the asset is acquired, the allowance is one-half of the regular CCA deduction. Consider not claiming CCA when taxable income is low or not available.  By doing this, one can increase the available deduction in future years to reduce higher taxable income. Purchase new assets before the fiscal year-end to minimize taxes with a CCA deduction if it’s been a better year. Remember the half-year rules, where applicable.

Capital Dividend Account (CDA) is a “tax” account that becomes part of the retained earnings of the corporation.  It provides for a tax-free distribution of certain sums. For example, a Canadian Controlled Private Corporation (CCPC) that incurs a capital gain during the year may pay out the non-taxable 50% of the capital gain to shareholders with no personal tax reporting required. In this case, it becomes extremely important to verify the CDA account balance prior to declaring the CDA dividend, since prior year capital losses are applied against the gain, resulting in the possible elimination of the CDA account.

Dividend Sprinkling is a way to distribute retained after-tax earnings from a CCPC to shareholders in a tax-efficient manner to the personal tax return. By determining what personal annual income will be for the current calendar year of the individual shareholder, a family business can structure the income level of each shareholder to minimize personal taxes for the family unit as a whole.

Refundable Dividend Tax on Hand (RDTOH).  When a corporation pays out a taxable dividend to the shareholders, the corporation receives a tax refund of the taxes paid on specified investment business income (SIBI) at the rate of 33.3%.  This is by far the most often missed tax credit available to the corporate owner-manager, simply because it doesn’t show on the financial statements, and carry-forward balances on the T2 return should be, but are not always checked annually. It represents, in short, the amount of income taxes that the corporation has paid in previous years on investment income and is important because of the tax refund triggered on payment of the taxable dividend to the shareholder.

These and other important year-end tax planning matters for business owners will be the subject of the fall Distinguished Advisor Workshops being held in Winnipeg on October 27, Vancouver October 28, Calgary October 29 and Toronto on November 2.   Registrations are now being accepted to hear Canadian business and estate tax expert Larry Frostiak and business planning expert Jenifer Bartman on the most recent trends in this area of study for advisors.