It’s never too early to plan for the company Christmas party in December, especially if you’re a small- to medium-sized business owner and are trying to get a head start on your taxes for the year.
“Usually meals and entertainment expense has a 50-per-cent limitation on what you can deduct,” explained Jennifer Dunn, East Group Tax Service Line Leader with BDO Canada in Charlottetown. “However, when you have holiday parties and the party is open to all employees, provided the expense doesn’t exceed $150 per person, the business will get to deduct 100 per cent of those costs.”
That recommendation was one of the year-end tax strategies recently outlined by BDO Canada that can affect an owner’s personal and business finances.
Pay your family “but wisely” is another strategy, especially given new rules regarding taxation on splitting income (TOSI), especially to determine if the remuneration plan with family members is appropriate.
If a business owner fails to meet the TOSI rules, “it will result in family members being subject to the highest marginal tax rate, which is not a good result.”
Business owners also have to be mindful of buying capital assets before the end of the fiscal year.
“By doing so, they’ll benefit from half of the tax depreciation or capital cost allowance on that piece of equipment, for example, provided it’s put in use before the end of the year.”
They may also want to delay selling capital assets until 2019.
“We (can) defer taxation on any recapture or capital gains that may have been realized on the sale of those assets.”
For tax advisors like Dunn, this year also involved working with clients on the new tax rules regarding income splitting as well as passive investments.
She said, in particular, clients have been asking questions about splitting income and whether or not they can continue to pay dividends to family members.
Dunn explained they can if the recipient falls into any of three exclusion tests – the excluded business, the excluded share and the reasonable return test.
“It’s just that they’re so complex, they really need to look to their account- ants for education about these rules.”
She said the easiest test is the excluded business, which involves a family member working, on average, 20 hours a week in the business.
“If you are paying a dividend to them, they will not be caught by the TOSI rules.”
The excluded share test involves the family member owning at least 10 per cent of the votes and value of that company. The test involves determining whether someone has direct ownership as opposed to ownership through shares as a beneficiary in a family trust, for example.
If the client doesn’t meet the other two tests, the last resort is the reasonable return test, Dunn said.
In this test, the Canada Revenue Agency will look at the family member’s labour or property contribution as well as whether or not the family member has assumed any of the risks of the business.
“This test is very subjective, and therefore it’s a little more difficult to meet that test,” she said.
Paul Deighan, a tax partner with Grant Thornton in Charlottetown, described the experience of working with clients with the new tax rules as “education, planning and complexity.”
“It’s just that they’re so complex, they really need to look to their accountants for education about these rules.”
In terms of year-end planning, he explained sole proprietorships and partnerships generally use the end of December as a year-end for tax purposes while incorporated businesses can have a year-end any month.
Even so, Deighan noted that businesses should be mindful of any balance owing to the Canada Revenue Agency and making sure their installments are up to date with the goal of paying off the balance.
As well, Deighan said owners with a salary that borrow money from the company have until the end of next year to repay that amount or declare it as income, either as a dividend or a bonus. Even though owners have until the end of next year, Deighan said with the new passive investment rules coming into effect in the new year, owners may want to deal with the matter this year, especially with respect to dividends.
“The new passive investment rules have made it a little more challenging for owner-managers to examine their compensation strategies at the end of the year,” he said.
One of the concerns Deighan has with owners of smaller businesses is they don’t have a good grasp of their financial results, which makes year-end tax planning difficult. A way to deal with that issue is cloud-based accounting software, which is “basically doing their books on their phone,” to be better prepared when meeting with an accountant.
“It’s actually quite useful for these business owners because it’s giving them real-time data that they can access anywhere, anytime, anyplace, and let them know how they’re doing,” he said. “Having good information throughout the year is important however a business owner manages to do that, whether that’s hiring people to do that for you or having the technology available to do that.”