The federal government implemented major tax reforms in 2018 – changes that will not have escaped the attention of business owners.
Finance and tax experts have been poring over the new legislation in an effort to offer their clients the best advice – what to do, and when to do it.
How significant are these changes?
Kody Wilson, a tax and advisory services partner at Ottawa accounting firm GGFL, puts it this way:
“If a business owner doesn’t have an accountant and tax advisor now, this is the year to do it,” he says. “Accountants are still working through what all these changes mean, so I can only imagine how difficult it is for business owners who need to focus on the day-to-day operation of their business.”
At the dawn of this new year, Wilson has a checklist for business owners looking to adapt to the new rules. These are areas all business owners should be thinking about, he says.
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Timing of expenses: Business owners looking to buy, for example, new equipment or a building should consider making their purchase before the end of their fiscal year to qualify for a deduction and get credit for the purchase. Among the tax changes are enhancements to the capital cost allowance regime, making the purchase of capital assets slightly more lucrative than in the past.
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Salaries, bonuses and dividends: This is always a major planning exercise for GGFL and its clients. The goal is to optimize the mix of these three forms of compensation, based on the after-tax cash-flow needs of the taxpayers and their families. This will be a more complicated analysis this year with the new tax changes affecting dividend payments.
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Investment income for the year: If a company or individual has excess cash and has, for example, invested it in real estate or bonds, there are new investment income rules to consider. It is now more important to analyze that income to determine if it is reaching certain thresholds. Does it now make sense to unload assets such as stocks and bonds that you are currently holding? If you have some investments currently in a loss position, you might want to sell now to get credit for the inherent capital loss on an investment. You can trigger that loss to offset gains.
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Structure of operations: This is something GGFL reviews annually with its clients. Who owns the shares in the company, and is that ownership still the most advantageous? Are you considering buying real estate or operating in the U.S.? This is a multi-question examination.
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Think about next year: Take a proactive approach and anticipate what the future might hold. Is retirement on the horizon for one of the owners? If so, is there an exit strategy for the owner? Is the owner looking for ways to compensate key employees? Is the owner considering selling to the current management team? Transition of this nature necessitates long-term planning to properly maximize tax gains. Many people pass businesses to their children but GGFL professionals are seeing an increasing number of business owners whose children don’t want to be involved – opening the door to a sale to current managers or an outside party.
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Personal money paid into the business: Perhaps you only had a personal credit card with you when you bought an item for the business. Make sure you receive credit for that. It’s not something accountants necessarily see when examining a business’s finances, but GGFL always asks its clients the question.
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TOSI (Tax on Split Income): Rules governing the payment of dividends to family members are having the biggest impact on small and medium-sized businesses. The basic question is this: Do you meet any of the exclusions to get out of the high tax rate TOSI would otherwise cause? It’s important to look at the tax situation in a holistic way. Does it still make sense to keep doing what you’re doing, or do you need a new strategy?
Another tax change relates to investment income earned at the corporate level. If, for example, a person has two or three different businesses, it’s important to carefully manage investments or possibly risk losing the small business deduction in a given year. If investment income is too high in a corporate group, it starts to grind down the small business deduction to which the business would have otherwise been entitled.
“If business owners fail to plan ahead, they risk paying too much tax.”
Navigating these changes requires expert advice, says Wilson.
“If business owners don’t do a thorough annual analysis of all these areas, and fail to plan ahead, they risk paying too much tax,” he says. “If a person doesn’t fully understand the new rules, they also risk exposing themselves to a CRA audit at some point in the future.
“Corporate tax was already fairly complicated,” adds Wilson. “It just became a lot more complicated.”
