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Tax Questions Every Small Business Owner Should Ask


You’ve worked hard building your business and the last thing you want to see is your hard-earned income falling into the hands of the tax authorities. Whether you’re saving for retirement or hoping to hand down a thriving business to your children, one thing is certain — you need a strong tax plan to avoid paying unnecessary taxes.

While your ideal plan will inevitably depend on your unique circumstances, below are a few questions every small business owner should consider earlier rather than later:

Are you making the most of your charitable donations?

Charitable donations to registered Canadian charities or other qualified donees earn you tax credits. But are you aware that charitable donations that total over $200 provide you with more of a tax credit because they’re assessed at a higher rate?

The charitable donations tax credit can provide you with a tax credit as high as 29 percent of the amount of a personal donation — which can then be combined with a provincial tax credit as high as 24 percent (depending on your province).

Understanding this, it’s clear that setting some money aside for a charitable cause can significantly reduce your tax burden — but exactly how you do that will depend on a few factors. While personal donations are eligible for a non-refundable tax credit, for instance, corporate donations deliver income deductions, so the route you choose will depend heavily on your current tax situation.

It also may be helpful to know that unused donations can be carried forward for up to five years — and if you gift a publicly traded security with accrued gains to a registered charity, you’ll receive a tax receipt for the donation and eliminate capital gains tax on disposition.

When will you start receiving Old Age Security (OAS) benefits?

While everyone is eligible to receive OAS at age 65 (provided you’ve lived in Canada for at least 40 years after age 18), not everyone knows you can defer receipt of benefits for up to five years.

The upside to this is that, after age 70, you’ll actually receive a higher OAS payment every month. Of course, when making this decision, you’ll need to consider your overall retirement goals and determine whether you can afford to go without OAS until age 70. What type of lifestyle do you hope to lead at 65? Will you have access to other sources of income, such as a Registered Retirement Savings Plan (RRSP)? Do you plan to continue to work at 65?

If there’s a chance you still may be working, you need to be aware of the OAS recovery tax. If your income exceeds a specific threshold, your OAS allotment will be clawed back.

Have you considered splitting your investment income?

A prescribed rate loan is a great way to split your investment income as it allows you (the higher-income family member) to loan money to a lower-income family member (say, your spouse) or a family trust.

Through a formal loan agreement, you can get around typical income-splitting limitations by loaning your recipient capital that they ultimately invest and that investment income is then taxed at their lower income tax rate. The one caveat? All interest must be paid at the CRA prescribed rate by January 30.

Should you transfer investments with unrealized losses to your children?

Disposing of property which has declined in value (i.e. marketable securities, etc.) can be an effective way to shelter capital gains realized in the same taxation year. This can be achieved by selling the underlying asset for its fair market value or by gifting the asset to another person for nominal consideration. Either way, the transferor will report a capital loss for tax purposes for the difference between the asset’s fair market value and its cost to the taxpayer. Transferring such assets to children will also allow for any future changes in value to be realized in the child’s hands. However, care must be exercised when structuring such a transaction to ensure that income tax rules such as those pertaining to attribution of income, and superficial losses are being considered. It may also be advisable to document that there has been a transfer of ownership either by way of a gift or a sale. Transferring investments with unrealized losses to children should be contemplated when planning one’s estate and succession of property.

Decisions, decisions

These are just a few questions you should be asking yourself as you grow your business. That being said, there are likely other tax-saving steps you can take to minimize your tax burden but they may involve a bit of forward-planning. To be on the safe side, recruit the services of a tax professional to make sure you’re leaving no stone unturned.

To learn more about how MNP can help address your tax questions and succession planning needs, contact an MNP Business Advisor near you.