The end of the year is a strategic time to optimize your tax situation, whether you’re a shareholder, an employer or an individual. In this article, we discuss practical tips and essential reminders for maximizing your tax savings, avoiding the pitfalls of taxable benefits and effectively planning your financial decisions.
Shareholder remuneration: Rule of thumb
Depending on your company’s tax rate, it may be more advantageous for a shareholder to be remunerated by salary or dividend.
As a general rule, if your company generates income on which you don’t benefit from the small business deduction, or if your company has not reached the 5,500-hour threshold in its fiscal year, it may be more advantageous for the shareholder to be compensated in the form of salary. This allows the corporation to deduct the salary expense when calculating its taxable income. On the other hand, if the company is subject to a 12.2% tax rate, it is generally more advantageous for the shareholder to receive compensation in the form of a dividend.
However, it’s crucial to take other factors into account before making a decision. A number of factors need to be analyzed in order to make the best, most informed choice, including QPP, RRSPs, childcare costs, and so on.
See our article: Shareholder remuneration: salary or dividend? – Amyot Gélinas
Repayment of advances
Be sure to check whether shareholder advances were taken in the company’s previous fiscal year. If so, repay them before the corporation’s year-end to avoid them being considered a taxable benefit, which would be included in the individual’s income for the year in which the advance was made.
Capital gains deduction, succession planning and alternative minimum tax (AMT)
- It should be noted that the deduction limit for small businesses has increased from $971,190 to $1,250,000 since June 25, 2024, following the tabling of the federal budget.
- If you’re concerned that your company’s shares may lose their QSBC (qualified small business corporation) status in the near future, consider crystallization. This could allow you to benefit from the capital gains deduction and realize significant tax savings in the future.
- Plan your compensation appropriately if you have AMT to recover.
Realize capital losses to reduce your taxes
In anticipation of the increase in the capital gains inclusion rate, many people have voluntarily generated capital gains to ensure that the income inclusion rate will be 50% rather than 66 2/3%. If this is your case, it may be worth consulting your broker to assess the possibility of realizing losses before the end of the year. These losses could offset your gains, thereby reducing your tax bill.
The holiday season and taxation
In these times of labour shortages, here’s an interesting strategy to help retain your key employees: an employer can offer an employee gifts worth up to $500 without them being considered a taxable benefit to the employee at federal level. At the provincial level, this limit can be as high as $1,000, if the gifts are combined with rewards. The company can therefore benefit from an expense on the value of the gift, and the employee does not have to pay tax on this value.
Buying your first home
Heard about the TFSA and its tax advantages, but don’t have the funds to contribute? Are you planning an HBP (Home Buyers’ Plan) from your RRSP? Did you know that you can maximize your tax benefits by contributing to your TFSA with funds withdrawn from your RRSP (HBP), thus benefiting from a double deduction on your income?
Quick reminders:
- Beware of taxable benefits for employer-provided cars. Document your business mileage.
- Restructure your loans to make interest costs deductible.
- Consider contributing to your RRSP to reduce your tax bill and defer taxation until a later date.
- Income over $90,997 may result in a reduction of the old-age pension.
In short, strategic year-end tax planning can help you optimize your finances while avoiding tax pitfalls. Take the time to consult an expert to tailor this advice to your unique situation. The members of our tax team remain available to assist you and hope you find this tax information useful.
