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Year-end tax planning: business owners and employees
The COVID-19 pandemic has, for most of the year, certainly created a lot of disruption in the way we live on a daily basis. In the tax world, there has been some relief, including the extension of certain tax filing deadlines. But some things never change. The taxes will still have to be paid eventually, and the Canada Revenue Agency has not stopped working to collect them. So it is always important to do some planning to minimize the tax bill when due. With that in mind, and before we put 2020 behind us, let’s take a look at some year-end tax planning strategies for business owners and employees before the April tax filing deadline of the year. next is on our doorstep again.
Tips for business owners
1. File an income tax return
Many new businesses suffer start-up losses in the first few years, especially for 2020 with the pandemic hitting everyone. If you personally operate a business, you must file a return for each year, even years of loss. This is because the loss in your business can be used to reduce income from other sources in the current year, or it can be carried back three years and forward for 20 years. The loss will reduce income from all sources – be it the business itself, employment – even investment income. But to claim the loss, you must file an income tax return for the year.
The end of the year for an individual who is a sole proprietor or an active partner in a partnership created since 1995 is December 31. Self-employed taxpayers and their spouses (if not separated) have until June 15 to file a return, due must be paid by April 30.
2. Reduce your installment payments
If you pay taxes by installments, you’ve probably received several notices from the CRA informing you of your installment amount. If your income has declined over the past two years (and likely for 2020), think twice before sending your check.
The CRA’s installment calculations are based in part on your tax situation two years ago and in part on last year’s. Instead of using the CRA method, you have the legal right to base your installment payments on last year’s tax situation. You can even base your payments on the estimated tax situation for the current year, if it is lower; but in this case be careful – penalties may apply if you underestimate your taxes and your down payments turn out to be less than the other two required options.
If your income has declined over the past two years, using one of the other two options may allow you to reduce your quarterly payments without incurring interest penalties. But if you under-install, the CRA will start charging you interest. The interest rate is currently 5%. However, this rate is compounded daily. Worse yet, it’s non-deductible. It is therefore an expensive way to improve your cash flow situation. For seriously overdue payments, an interest surcharge of 50% is applied.
If, during the year, it turns out that you have paid more installments than necessary, you might consider the possibility of intentionally not meeting the installment schedule by paying insufficient or late installments. In fact, it is quite “legal”.
By the way, if you over-installed or overpaid earlier, the CRA will give you a credit (called “offset” or “counter-interest”) against the interest on late or insufficient payments for the year. Very basically, the rule works as if you had deposited the remittance into a bank account and earned interest (at the rates prescribed by the CRA – currently 3% for individuals and 1% for corporations) as long as the remittance is anticipated or excessive. These “credits” can then be used to claim interest penalties on insufficient or late payments. The flip side, of course, is that you can reduce the interest charge on a late or insufficient tax deposit by overpaying other installments or paying them before their due date.
Deductions for most normal business expenses are based on whether the expense was incurred at the end of the year, rather than whether the item was actually paid for, e.g., office supplies, auto repairs and others, etc. Exceptions include compound interest charges – regular (“simple”) commercial interest may be expensed when due, site survey and utility connection costs, as well as modifications to the site. ” disability-related equipment and buildings
Consider speeding up purchases of equipment, capital, and other expenses before the end of the year. Examples include auto and equipment purchases (half of normal depreciation can be claimed this year – next year you claim the full depreciation rate), auto repairs, etc. Note: Although the depreciation rules restrict the write-off of capital purchases, you can claim a full GST credit for the year of purchase. So if you buy by the end of the year, the credit will allow you to reduce the GST you owe.
If you “accumulate” a salary for your family members (this must be reasonable for the business service they render), you can claim a deduction as long as you actually pay the expense within 179 days of the year of your employment. business. This may allow the recipient to defer tax on the amount until next year.
Tips for employees
Some may think that as an employee, the ability to do tax planning and reduce your taxes is somewhat limited. However, where there is a will, there is a way.
1. Reduce your withholding taxes
For employees, an unlikely source of money could be payroll deductions from your paycheck. Many people regularly get tax refunds due to deductions such as alimony payments, finance charges on investments, etc. If you are one of them, call the payroll division of your local tax office. Tell them you want to claim a reduction in source deductions under subsection 153 (1.1) of the Income Tax Act (if you quote the section number, they will know you are serious). They will send you a form and ask for information to save your request. If you do, they’ll likely lower your hold so you can pocket the money. Most tax offices are quite cooperative when it comes to this procedure.
According to the CRA, there is no specific minimum amount below which they will not consider a claim. Although technically you are supposed to show that without reduction you are a tough case, the CRA seems to be pretty easy on this requirement.
One item that can help you get a reduction in source deductions is an RRSP contribution at the start of 2021. Contributing at the start of the year also means that your income will be compounded tax-free on as soon as possible.
Warning: If you base your claim on a tax shelter, questionable deduction, or other aggressive tax planning, a request to reduce withholding taxes could result in an untimely review. Better to leave it pretty much alone.
2. Defer income
If possible, you should postpone collecting employment income if your tax bracket is lower in 2021.
3. Loss impairment
Employees have the right to claim tax depreciation (called capital cost allowance or CCA) on automobiles, airplanes and musical instruments, depending on the circumstances. If you are eligible to deduct CCA and plan to purchase a new asset, you should do so before the end of the year. This will speed up capital cost allowance claims by one year. The asset must actually be available for your use to be eligible for a PAD claim.
4. Reduce the tax on the “operating costs” of automobiles
If the personal use of a company car is less than 50%, consider notifying your employer before December 31 if you wish to take advantage of the taxable operating expense benefit based on half of the expense for the right to use. usage, less any refunds you paid. Other ways to reduce your operating benefit include reimbursing your employer for operating costs, reimbursing your employer for 100% of the personal use portion of actual operating costs, and minimizing your driving. personal.
5. Reduce the tax on “waiting fees”
The waiting costs are calculated on the basis of the original cost of the vehicle. After a few years, when the vehicle is worth less, consider purchasing it from your employer to avoid high user fees. You can also ask your employer to sell the car and buy it back or lease it again or choose a cheaper car.
Originally published by the Fund Library
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.