Year-End Tax Planning Checklists
The following checklists provide tactics you should consider as part of your year-end tax planning. Many of these points are complex, so working with your PwC adviser is essential.
Salary/dividend mix – Determine the optimal mix of salary and dividends for you and other family members for 2010.
Consider all relevant factors, including the owner/manager’s marginal tax rate, the corporation’s tax rate, provincial health and/or payroll taxes, RRSP contribution room ($124,722 of earned income in 2010 is required to maximize RRSP contribution in 2011), CPP contributions and other deductions and credits (e.g., for child care expenses and donations).
Be aware that the receipt of dividends (especially eligible dividends) can increase your alternative minimum tax (AMT) exposure.
If the individual does not need to extract cash, consider retaining income in the corporation. Tax is deferred if the corporation retains income when its tax rate is less than the individual owner-manager’s rate. See Table 1 on page 16. In times of economic uncertainty, this will help the corporation’s cash flow. It also will allow the corporation to have income and pay corporate tax that may be recovered by possible future business losses.
All provinces and territories – Ensure that owner-manager remuneration strategies account for increases in personal taxes on eligible dividends in 2011 and 2012. Except in Yukon (and Nova Scotia if Nova Scotia’s 2011 fiscal year budget is balanced and taxable income exceeds $150,000, see discussion on Nova Scotia below), consider accelerating eligible dividends to 2010 to take advantage of lower eligible dividend tax rates in 2010.
Yukon – Consider deferring the distribution of eligible and non-eligible dividends to take advantage of lower dividend tax rates in 2011 and later years.
Manitoba, Prince Edward Island – Consider accelerating non-eligible dividends to 2010 to take advantage of lower non-eligible dividend tax rates in 2010.
New Brunswick, Newfoundland and Labrador – Consider deferring the payment of salary and/or non-eligible dividends to 2011 and later years to benefit from decreases in personal tax rates in New Brunswick (2011 and 2012) and Newfoundland and Labrador (2011). However, New Brunswick’s new government could revise scheduled personal tax decreases.
British Columbia – If the owner-manager’s taxable income is below the second lowest tax bracket (i.e., $71,719 in 2010), consider deferring the payment of salary and/or non-eligible dividends to 2011 and later years to benefit from decreases in British Columbia’s two lowest personal tax rates in 2011.
Nova Scotia – If Nova Scotia balances its 2011 fiscal year budget, it will eliminate the top $150,000 personal tax bracket and 21% rate and reinstate the 10% personal income tax surtax in 2011. In this case, owner-managers should be aware that personal tax rates may change in 2011 and adjust their strategy on the payment of salary and/or dividends accordingly.
Qualifying small business corporation share status – Recognize that forgoing bonus and/or dividend payments and stockpiling passive investments could cast doubt on whether substantially all of the assets of a Canadian-controlled private corporation are used in an active business, in turn jeopardizing the ability to claim the $750,000 lifetime capital gains exemption.
Scientific research and experimental development (SR&ED) – Consider not forgoing bonus payments if it causes a Canadian-controlled private corporation’s SR&ED investment tax credits (ITCs) to be non-refundable and subject to the lower ITC rate. (But retaining some income will allow the company to use the non-refundable ITCs.)
Dividend tax regime – Be aware of how the dividend tax rules will affect dividend distributions.
Designate dividends that qualify as eligible dividends. (Designation procedures differ for public and non-public companies, but both require designation at the same time as or before payment of the eligible dividend.)
Consider electing to treat all or part of any excess eligible dividend designation as a separate non-eligible dividend.
Canadian-controlled private corporations (CCPCs) – Determine the CCPC’s ability to pay eligible dividends by estimating its general rate income pool (GRIP) as at its 2010 year end. Consider distributing dividends in the following order:a
Eligible dividends that trigger a refundable dividend tax on hand (RDTOH) refund.
Non-eligible dividends that trigger a RDTOH refund.
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a. However, depending on the jurisdiction of residence, paying non-taxable capital dividends should be inserted as the second or third preference.