Corporate tax is complicated. Big businesses have entire departments that do nothing but tax under management of a very senior tax accountant. When your business grows, so does your tax return’s complexity and the need for a good tax accountant. There are accruals, amortizations, gains, taxable gains, business income, investment income, trading income – and that’s just the income lines. Saving money on taxes doesn’t have to be extremely complicated. Here, we lay out tax saving strategies and best practices that will help you cut your tax bill and put more money back into your business. As a Tax Accountant and CPA, this is how I recommend a small business here in Pickering gets organized.
Keep Good Records For Your Tax Accountant
Let’s start with the easy stuff.
Maximize your deductions by using only Corporate Credit Cards, Debit card and Cheques to pay for expenses. Cash payments are tougher to prove bona fide and the particulars are much harder to recall after three years. Good documentation and record keeping makes your deduction bullet proof for a good tax accountant to defend. An auditor forced to dig to balance accounts will review more than an auditor that can quickly sample. We’ll talk more about audit risk later.
Effectiveness is doing the right things, efficiency is doing them well. If you’re not using an accountant or bookkeeper to complete your books, you’re probably running you’re business like a sole proprietor and not a business. Professional accountants and bookkeeper know instinctively know where accounting items should be posted and how to most efficiently complete the work. A professional will arrange your records, so down the road another person, such as your tax accountant, can quickly find invoices, bank statements and other records. I’ve see too many shopping bags and shoe bag systems.
How would you like to improve your after tax returns by 30% without having to sell an extra product or do more work? The lowest hanging fruit in taxes is actually two housekeeping items. That is you need to file your taxes on time and pay on time. Corporate tax returns are due six months following your fiscal year end. That gives you six months to receive all of your bank statements, receive all invoices and in most case most of your customer payments. If your tax accountant is to meet these goals your records must be available.
Late filing increases your tax bill by 10% for first timers and 20 and 30% for repeat offenders. A 30% tax savings is what we tax accountants call a home run. These rules apply equally to your HST and Payroll accounts. Late payments also cause unnecessary interest payments.
Remember, we can move your corporation’s fiscal year end date. The majority of businesses we see have fiscal year ends of December 31 and June 30 but that doesn’t have to be so. December year ends mean we’ll be extremely busy trying to finish your books, your payroll and T4s in 59 days. Fiscal year ends after April enable us to adjust owner compensation to balance corporate and personal taxes. As a CPA and tax accountant I recommend a quarter after your busiest period or during a seasonal slump.
The CRA requires that if your business owns more than $3500 in taxes, you are required to make instalments throughout the year. So year-end timing doesn’t really affect cash flow.
Minimize Audit Risk To Help Your Tax Accountant
Minimize your controllable audit risk is one goal for every tax accountant. There were 1.1 million business in Canada in 2012. Of those, CRA only audits a very small percentage. Why they audit is highly speculated. CRA is secretive on what criteria it uses to select taxpayers for audit but most agree big refunds, big changes and certain industries target refunds.
Our opinion is there’s nothing to suspect they don’t use the same tools big businesses use to track their clients. We can infer from two business models what CRA might do:
Big retailers such as Target, use customer data on our affinity cards to predict consumer behaviour. Having a baby triggers a lot of consumer spending. There’s the consumables such as diapers and wipes and clothes but also capital items such as furniture, strollers and car seats. I’ve read that Target can very accurately predict when someone is expecting a child; consumers buy the same early terms items such as books and vitamins. Target then uses this information to send you info on big ticket items such as furniture and carriages.
Think about getting car insurance. Your insurance company rates based on your characteristics. They keep statistics on loss experience based on your age, postal code, car type, driving record and loss history. When I worked in insurance it was understood that once someone had one accident, they were twice as likely to have another. Now think about the most expensive insurance type to insure – you’re 17 years old, newly licensed, you have two speeding tickets, one claim and drive a race replica motorcycle. The insurance company knows that the 17 year old is the greatest risk on their books and accordingly charges exorbitant rates. Now think about the relative rate a 45 year old Camry driving CPA with a clean record pays. Where rate would you rather pay?
As stated, CRA is very secretive about the criteria it uses to select taxpayers for audit. We know that CRA has personal information of 30 million Canadians including where we live, who we’re related to, what we earn and what similar taxpayer’s returns look like. Just like big retailers use big data and behavioural characterises to predict shopping patterns, CRA has uses perfect personalized information to assess potential audit victims.
So what does it mean? Follow the golden rules that a good tax accountant will set for you: 1. File on Time 2. Pay a little 3. Pay on Time. Make your tax profile look like the low risk Camry driver.
“But my books are clean”. Accounting and tax is a subjective art. Our interpretation is that your Hummer H2 is a legitimate and required business expense however Joe from CRA feels that it’s a luxury and personal item. (There was real case where the Hummer owner won at the Tax Court of Canada) CRA will deny the questionable expense deduction in your corporation and add to your personal return as a taxable benefit. Difference in opinion on the deductibility of controversial expenses can go badly for the owner shareholder. Reducing your audit risk means no subjective arguments and no trips to tax court.
Reduce the Corporate tax rate from 49% to 17% by managing income to come under the $500,000 Small Business Deduction Limit. Many small business companies located here in the Pickering area can utilize this Small Business Deduction Limit. Use the Small Business Deduction to lower your tax rate on qualifying income under $500,000. Through proper income planning for the corporation and owner, income can be managed to always come under the small business limit when working with a good Tax Accountant.
Use income splitting strategies. Income splitting, sometimes called income sprinkling, is the process whereby income is un-concentrated and split between family members and corporate beneficiaries. Each person may claim the personal tax exemption on the first $11K from tax. Higher incomes are taxed at higher rates. If we have one spouse earning $100K and one earning zero, there’s a big opportunity for income splitting and saving 10-20%. If you have working age children, we can pay them for the work they do tax free up to $11K. Consideration need to be given to WSIB, CPP and EI before jumping into any strategy but we can help. Pickering is a family oriented city, chances are if you have a small business in in Pickering, you are part of a family and you or your tax accountant should be looking into this strategy.
Use the $814K lifetime capital gains exemption to shield the gain on sale of your business. The sale of qualifying shares of small businesses can be shield including the sale of buildings. Rules apply and early steps may be needed to ensure your business fits the exemption guidelines. A qualified CPA Tax Accountant can ensure you meet these guidelines. The CRA refers to these as Qualifying Small Business Corporations or QSBCs.
Shield Capital Gains from taxes for assets used in your businesses. Capital Gains can be shielded through tax free appreciation, deferral on assets contributed to your business and assets sold but replaced. Assets owned in your corporation may increase in value tax free. When you contribute assets to your corporation, this can trigger a capital gain on disposition; use a Section 85 Rollover deduction to defer taxes. Additionally, when you sell and replace an asset such as real estate, you can rollover the old cost to the new asset and defer gains. We can help you determine the best strategy for you.
We covered the easy stuff, the hard stuff and skimmed the complicated. Like in a lot of things, a good defence is preparation and a CPA who is an experienced Tax Accountant can build that defence for your company. There are thousands of small business located here in Pickering and Durham Region that are not taking maximum advantage of these basic principles I have laid out. Good planning and advice is everything. The right advice is one that is structured exclusively for your business by a tax accountant and reflects the realty of your business and your goals. We specialize in getting to know our local Pickering and Durham Region clients deeply and providing solutions that work for you. We would be happy to sit down to discuss your needs.
Be sure to read our Pickering Tax Tips article related to incorporation vs. sole proprietorship!
I am CPA and Tax Accountant and am available to answer questions from individuals or small business here in Pickering and Durham region, please feel free to contact us!
You can reach us by calling (905)-831-6383 or use our confidential Contact Form or visit us!
James Abbott, CPA and Associates