Mid Year Business Tax Planning Checklist
June 30, 2010
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 this transition, contact a qualified tax professional 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.”
- Consider alternatives – “Consider taking a salary instead of a dividend,” advises Chartered Accountant Ken Bell, principal, Kenneth Bell CA Business Advisory Group in Brampton. “If you use a vehicle for business and you are incorporated, consider receiving a mileage allowance, because it may cover more than the actual amount it costs to operate your vehicle.” Bell also suggests setting up a rental agreement with your corporation for a portion of your house. “It’s treating a portion of your house as a second location for your office and is better from a tax perspective than the home office deduction of an employee.
- 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 the deduction expires.”
- 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 so you have a record of what you paid.”
- Consider a bonus before year-end – “If you are incorporated, accruing a bonus before year-end can provide a deferral of tax, as the corporation can deduct the bonus expense when it is accrued, 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.” It’s not always advisable to accrue a bonus, adds Malachowska, so check with your tax advisor first.
- Make an in-kind donation to a charity – “You will receive a tax deduction for in-kind donations of things like used vehicles or furniture to a registered charity,” says Bell. “An appraisal of the value of the donated items is required, but some charities will arrange that for you.”
- Assess your RRSP strategy – “Make your Registered Retirement Savings Plan (RRSP) contributions as early in the year as possible,” advises Bell. “If you have an investment outside your RRSP and have a capital gain, you must declare it and can then transfer the investment directly into your RRSP. However, if you have a loss and transfer the investment directly into your RRSP the loss will be denied by the CRA. In that case, it is better to sell off the investment and transfer the proceeds to your RRSP.
- 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.