Tax planning with the experts at Bateman MacKay LLP is often an ongoing part of business. As the calendar year winds to an end, it is an important time to evaluate your current tax planning for this year and determine if any actions should be taken prior to December 31st. Our 2022 Year-End Tax Planner denotes some tax changes and tax planning opportunities specific to this year. If you have questions about any of the changes or opportunities below, please contact your Bateman MacKay Business Advisor for advice specifically tailored to your situation.
As proposed in Budget 2022, the Small Business Deduction limit is now reduced by $1 for every $80 of taxable capital in excess of $10 million. As such, the limit will be more gradually reduced, and only eliminated where taxable capital equals or exceeds $50 million. Previously, the small business deduction limit would be reduced when a corporation’s taxable capital was between $10 million and $15 million and eliminated beyond $15 million. This rule change results in a reduced advantage to accumulating a passive investment portfolio within an active private corporation. Ensuring passive investment income does not exceed $50,000 in a year will minimize the impact of these new rules.
An “avoidance transaction” where a transaction exists primarily for the purposes of tax benefits must be reported to the CRA if it meets certain conditions. It is currently not known when these rules will take effect, but can be as early as 2023. Consideration can be given to implementing such transactions prior to 2023.
Private corporations which are not Canadian-Controlled Private Corporations (“CCPCs”), but are factually controlled by one or more Canadian persons, are subject to the same investment income rules as a CCPC. Prior to the year-end of the corporation, consider unwinding any transactions that may have been undertaken to have resulted in a Substantive CCPC.
For tax years beginning on or after October 1, 2023, the EIFEL regime, is designed to limit the amount of net interest and financing expenses that certain corporations and trusts may deduct, to 30% of adjusted taxable income.
Federally incorporated businesses and businesses incorporated inside of Ontario, B.C., Manitoba, New Brunswick, Newfoundland and Labrador and P.E.I. must maintain a registry of all individuals with significant control over the company.
The Government of Canada has extended the original CEBA repayment deadline to receive partial loan forgiveness from December 31, 2022, until December 31, 2023.
Determine the most beneficial mix of salary and dividends for you and your family members. Consider all relevant factors including personal tax rates, corporation tax rates, RRSP and CPP contributions, provincial deductions and taxes, and available tax credits. Reasonable salaries can be paid to spouses or children that provide services to the business, which also allows for CPP, RRSP and other deduction purposes. A salary of $162,278 will provide the maximum $29,210 in RRSP room for 2022.
Understand your tax liability if you are operating as a Personal Service Business (PSB). A PSB exists where a person is incorporated and paid as a contractor but effectively operates as an employee. A PSB has a higher tax rate and is eligible for fewer deductions than a typical small business. The CRA is currently running an educational campaign and may focus audit activities on these businesses in the future. If you feel that your corporation may be viewed by the CRA as a PSB, you should seek professional tax advice without delay.
If corporate withdrawals are required, make sure to consider strategies to reduce the effective tax rate of these withdrawals. Using a capital dividend account, repaying shareholder loans or paying tax-effective dividends and/or capital gains are all potential options.
Accelerate the purchase of depreciable assets to ensure that they are available for use at the end of the year. Understand if your business is eligible to immediately expense up to $1.5 million per tax year and/or take advantage of the Accelerated Investment Incentive
If shifting income from one individual in a higher tax bracket to someone in a lower tax bracket, be sure to understand the TOSI rules. The TOSI regime requires a family member to be actively engaged in the company to split income. If not, the income can be taxed at the highest marginal tax rate. Income splitting has become exceedingly complex and if you are considering this strategy and tailored professional tax advice is crucial.
A new Federal tax of 1% of the value of the home may apply to vacant or underused residential property. In general, residential properties that are vacant for more than half of the year must pay this new tax. Trusts or private corporations that own any residential properties will be required to file an annual return related to the tax, regardless of the vacancy status of the property, even if one of several exemptions apply resulting in no tax payable. Bateman MacKay will send a detailed communication about this new tax shortly.
Profits from the sale of residential properties (including rental properties) that were owned for a period of fewer than 12 months are now deemed to be business income. The profit is therefore fully taxable as business income (100% taxed), and not a capital gain (50% taxed, and potentially eligible for the principal residence exemption). Careful attention should be given to these rules in planning
This new regime imposes a tax on certain vehicles and aircraft priced above $100,000 and certain vessels priced above $250,000. It is calculated as the lesser of (i) 20 percent of the value above the retail sales price thresholds or (ii) 10 percent of the full value of the luxury car, boat or personal aircraft. This regime came into effect on September 1, 2022. If you have purchased one of these items since then, you may owe this new tax.
Effective March 30, 2022, foreign entities that purchase or acquire certain residential property in Ontario may have to pay a tax determined by the value of the consideration for the property. If the agreement of purchase and sale was entered into prior to October 25, 2022, the tax rate is 20%, if, after that date, the rate is 25%.
This account, which will be available in “mid-2023” is designed to help first-time home buyers save up to $40,000 for their first home. Contributions to a TFFHSA would be deductible (like an RRSP), and income earned in a TFFHSA as well as qualifying withdrawals from a TFFHSA made to purchase a first home would be non-taxable (like a TFSA). The lifetime limit on TFFHSA contributions would be $40,000, subject to an annual contribution limit of $8,000.
This is a new refundable tax credit to support constructing a secondary suite for an eligible person to live with a qualifying relation. An eligible person would be a senior (65+ years of age at the end of the tax year when the renovation was completed) or an adult (18+ years of age) eligible for the disability tax credit. This tax credit would provide tax relief of 15% on up to $50,000 of eligible expenditures, providing a maximum benefit of $7,500. This measure would apply for the 2023 and subsequent taxation years, in respect of work performed and paid for and/or goods acquired on or after January 1, 2023.
If you received a personal COVID-19 benefit, tax on that benefit would have been paid at source or when that year’s taxes were filed. If you repay any COVID-19 benefit amounts that were received between January 1, 2021, and December 31, 2022, you have the option to claim your repayments as a deduction in the same year you made the repayment or in the year you received the benefits. A new Form T1B, Request to Deduct Federal COVID-19 Benefits Repayment in a Prior Year will be available in January 2023.
If you expect to be in a lower tax bracket next year and receive a year-end bonus, consider deferring the receipt of your bonus to early 2023. You may also request the bonus, or a portion of the bonus, to be transferred directly into your RRSP to prevent the withholding of taxes provided you have enough unused RRSP deduction room in the year of the transfer.
The Canada Revenue Agency (CRA) extended the availability of the simplified method to claim an income tax deduction for home office expenses (i.e. deducting a flat rate of $2 per day worked at home due to the COVID-19 pandemic) to the 2022 taxation year
You have until March 1, 2023, to contribute to your RRSP or a spousal RRSP to be able to deduct the amount on your 2022 return. If you have contribution room, (18% of earned income up to a maximum of $29,210) contributing before December 31, 2022, helps to maximize the tax-deferred growth in your plan.
Contributions of up to $6,000 for 2022 and any unused contribution room from 2009-2021 can be made to the TFSA. The TFSA allows for tax-free investment income including interest, dividends and capital gains, which may result in higher growth compared to a regular taxable account. Tax-free withdrawals can be made at any time, but caution that any amount withdrawn is not added back to your contribution room until January 1 of the following year.
While tax planning should be a year-round process, these common year-end tax planning strategies may maximize your tax savings. Professional tax advice is vital to the proper implementation of some of these strategies. If you have any questions about these or any other tax planning strategies, please contact your Bateman MacKay LLP Business Advisor for more information.
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