From deferring tax to saving money, I am always on the lookout for possibilities and methods to keep money in your business. December conversations with business owners tend to be some of the most enjoyable for me as there are often opportunities in December to review a client’s situation and look for money-saving or tax-deferral scenarios. December is also a good time to think about being compliant from a tax point of view.
Consider visiting with a tax advisor in December
The sooner you have draft year-end financial information and discuss it with a tax advisor, the better! Businesses with year-ends between June 30 and November 30 should visit a tax planner in December. Businesses with December 31st year ends should also consider a quick discussion this month, to look at whether money might be removed before the end of 2017. This approach allows an advisor to calculate the likelihood of income tax payable and if so best look at the potential tax savings or deferral options.
Plus – it feels great to be compliant! Many business owners wait until the tax deadline to delay the work of getting it done, but the fact is it feels great to have it done and behind you. Some firms like ours actually charge a reduced fee to prepare business tax returns in December or early January before “crunch time” arrives. In my opinion “The Early Bird Deserves The Worm”.
A business tax example
Let’s look at Suzie and Tim – a fictitious couple who own an incorporated business “ST Maintenance Inc.”. Their business had a Sept 30 year end and made a profit.
Historically, a great place to leave the profit is inside the corporation. Assuming it qualifies for the Small Business Deduction, ST Maintenance Inc. might pay as little as 15 per cent tax. The current government, however, may be passing legislation that could make this approach less attractive going forward. Tax advisors are studying this legislation as it evolves.
Business owners have personal financial requirements
Business owners often aren’t able to leave all the money in a business. Suzie & Tim need money personally to pay for their living expenses – such as their mortgage and food! The profits may need to be removed from the business.
Let’s say we determine the business should declare bonuses. In some cases, we can reduce ST Maintenance Inc’s 2017 taxable income, then find ways to pay Suzie and Tim personally such that tax isn’t owed until 2018. We can also look at whether we have an opportunity to split this bonus income between Suzie and Tim, resulting in a decreased tax burden.
Deadline for bonuses paid in 2017
Other businesses may determine that they should declare bonuses and pay them in 2017 – such as a situation where a minor profit was made this year and major growth is expected next year. Payroll source deductions for bonuses paid in December 2017 should be remitted by January 15 to avoid penalties and interest. With the changes proposed this year by the Federal Government, there may in fact be an increase in businesses paying bonuses in 2017.
Tax filing and payment deadlines – Avoid unnecessary charges
Many business owners look solely at their deadline for filing. Often they fail to realize that income taxes owed are due in advance of filing deadlines and can end up inadvertently paying interest and penalties.
ST Maintenance Inc. had a Sept 30 year end. Its tax return is due March 2018. However, if ST Maintenance Inc. owes income tax it is due in December 2017! If Suzie and Tim wait until March to calculate business taxes, they may find out in March that the business owed tax. The Canada Revenue Agency (CRA) considers ST Maintenance Inc. late for payment and will likely impose charges such as interest.
Still haven’t done your 2016 return?
The pain of waiting and worrying about tax returns is always worse than the reward of getting it done and taking it off your mind. It is typically better to actively work with CRA and get a plan in place rather than wait for them to find you. Connect with us at any time to tackle it together!
Proper tax planning requires professional advice relative to an individual’s specific situation. Information presented in this column is general in nature and does not supercede any advice provided by a professional. If you have questions about small business or corporate tax, contact David Perlock of The Velocity Partners at 705.645.3459 or [email protected].
Founder of The Velocity Partners, David Perlock has been consulting with clients for over 20 years. In that time he has worked with over 500 clients ranging from gas bars to airlines – independent contractors to home manufacturers – retail stores through wholesale distribution and manufacturers. David attended Wilfrid Laurier University for business administration. He is also a graduate of the University of Windsor (Commerce) and the Canadian Tax Academy. David enjoys helping small businesses save money, defer tax, adopt technology and grow!
Call David directly at 705.645.3459
Email: [email protected]