An effective tax strategy for your business is one that is kept up to date year-round. Here’s a mid-year checklist to help you stay on top of your business tax planning.
Implement the HST – “The new Harmonized Sales Tax (HST) came into effect July 1, 2010, so you should have already implemented a system to collect and remit the HST on sales and to track the HST you pay on purchases for the purposes of claiming input tax credits,” says Chartered Accountant Monika Malachowska of Etobicoke. “If your business has not made the transition from GST to HST, contact a Chartered Accountant for help.”
Evaluate your tax instalments – “Check your projected income and instalments to determine if an adjustment is required for the remainder of 2010,” advises Malachowska. “If you expect your annual income to fall, you may be able to reduce your remaining instalments to improve your cash flows. However, keep in mind that if you pay less than the instalment amount the Canada Revenue Agency (CRA) requires, and your final tax obligation is higher than your estimate, interest and penalties may be charged.”
Develop a remuneration strategy – “Consider which approach is better - taking a salary or a dividend,” advises Chartered Accountant Ken Bell, principal, Kenneth Bell CA Business Advisory Group in Brampton. “Dividends attract tax at lower tax rates making them preferential. But the whole picture needs to be reviewed, because dividend income is not pensionable for the Canada Pension Plan, nor does it create Registered Retirement Savings Plan contribution room.”
Consider taking a mileage allowance - “If you use a vehicle for business and you are incorporated, consider receiving a mileage allowance,” says Bell. “A mileage allowance may cover more than the actual amount it costs to operate your vehicle.”
If you need new computers, buy them soon – “The current 100-per-cent deduction for new computer equipment expires on February 1, 2011,” Bell explains. “So if you need new equipment, plan now and purchase before February 2011.”
Don’t fall behind on documenting your expenses – “Appropriate documentation of your travel, meals and entertainment expenses should always be part of your overall tax planning strategy,” says Malachowska. “These are among the expenses that the CRA scrutinizes most closely.”
Hire your child for the summer – “This is a good idea because it will give you a tax deduction and is good experience for your child,” says Bell. “Just be sure the amount of salary is what you would pay to a non-relative, and be sure to pay by cheque made payable to the child so you have a record of what you paid.” Remember that the funds will belong to the child once the cheque is issued.
Consider a bonus before year-end – “If you are incorporated, declaring a bonus before year-end can provide a deferral of tax, as the corporation can deduct the bonus expense as an accrual, but the employee is not taxed until the bonus is paid,” advises Malachowska. “The bonus must be paid by the corporation within 179 days of the year-end. The tax deferral is only achieved if the 179th day after the bonus is declared falls into the next calendar year.” As such, it’s not always advisable to accrue a bonus, adds Malachowska, so check with your tax advisor first.
Talk to a Chartered Accountant – “A CA can help you develop an overall business tax strategy to achieve both tax minimization and tax deferral,” advises Malachowska. “Once the initial planning is done, a mid-year or even more frequent follow-up may be necessary to evaluate the effectiveness of the plan and make any required adjustments.”
Brought to you by the Institute of Chartered Accountants of Ontario
