Benefits of Tax Planning
- While business owners often focus on cutting costs, slashing jobs and streamlining operations during tough economic times, there are some other potential sources of cash that are being overlooked. Take the time to discuss these tax planning opportunities with your tax advisor.
- Review tax installments
You may be able to reduce these installments by changing the calculation method. For example, you can base the calculation on the current year’s estimated taxes, rather than on taxes owing for the previous year (this is presumably beneficial in a poor economic climate). In certain circumstances, your company may qualify to make quarterly, rather than monthly installments.
- File early to accelerate refund claims
If you have already overpaid, filing early can result in this overpaid tax being refunded to the company soon after its year-end, rather than waiting for the filing deadline of 6 months after year-end. If your company has losses, filing early can allow for applying these losses against prior years’ income (up to 3 preceding years), to reclaim some (or potentially all) of the tax paid in those years.
- Explore potential refund opportunities
Have you considered all tax credits available to you? For example, innovative activities may qualify for investment tax credits under the Scientific Research & Experimental Development program, which pays out cash refunds (and/or tax credits) for qualified expenditures.
- Use tax losses to your advantage
If the companies investments have lost value, the resulting capital losses can offset any taxable gains realized in the current year or one or more of the past three tax years, thus potentially triggering refunds of capital gains tax paid in any of those prior years.
- However, beware of selling assets and acquiring them shortly thereafter. Complex tax rules may apply.
- Pay out capital dividend accounts before realizing losses
Beware that realizing capital losses as described above will reduce the amount of capital dividends that can be paid out, tax-free, to shareholders (provided the proper paper work is completed and filed with the CRA). The capital dividend account is the untaxed portion of capital gains and losses realized by the corporation, and applies to Canadian controlled private corporations. One-half of capital losses reduce the capital dividend account. As such, it is important to pay out the entire positive capital dividend account before you take steps to realize a capital loss.