Some year-end planning now may allow Canadian owners of private corporations to avoid headaches
2020 has been a particularly painful year for Canadian business owners, many of whom have seen a protracted drought in earnings amid continuing COVID-19 lockdowns. That means more than ever, reducing costs in other areas of their finances is an urgent priority, which includes tax planning.
“Although this very strange year is coming to an end, we expect the impact of what has happened to linger for an extended period of time," said Sanjaya Ranasinghe, EY Canada Partner, Tax. “Private business owners that plan early will invariably end up in a better tax position in 2020 and beyond than those who do not.”
One area of year-end tax planning business owners should consider, EY Canada said, is to use estate freezes to their advantage. With many private corporations suffering depressed valuations because of the pandemic, business owners might want to freeze the value of their business at its current price; that creates a chance to transfer the future growth value of the business to family members, and possibly defer paying taxes on that growth for an extended period.
Another opportunity for tax savings arises from arbitrage between different provinces’ corporate tax rates. Generally, a corporation located in Canada will have to pay provincial or territorial tax in the jurisdiction where it has a permanent establishment. If a corporation has permanent establishments across different provinces, it might be able to use differences in corporate tax rates between provinces to reduce its overall effective tax rate.
A Canadian-controlled private corporation that earns investment income during the year may also pay dividends to recover corporate refundable tax that it is subject to. “This refundable tax balance is tracked through the ‘eligible refundable dividend tax on hand’ (ERDTOH) and ‘non-eligible refundable dividend tax on hand’ (NERDTOH) balances,” EY Canada explained.
Because of the new work-from-home environment, the Canada Revenue Agency (CRA) will be permitting a simplified deduction of up to $400 – for which documentation will generally not be required – for employees working from home because of the pandemic.
“For employees who have incurred more than $400 for home office or other expenses directly related to the performance of their employment duties, it may be possible to deduct these costs,” EY Canada said.
Finally, it suggested the use of a prescribed rate loan as a way for some taxpayers to split income with family members who are subject to a lower marginal rate. Loans made after June 30, 2020 will be subject to a prescribed rate of 1% for as long as the loan remains outstanding, even in the eventuality that the prescribed rate rises in the future.
