TIME FOR A TAX TUNEUP
When sales and profits are under pressure, improving a company’s tax efficiency can provide a vital cash flow infusion. Tax costs are significant for virtually every business, and reducing or deferring taxes may produce significant savings for struggling enterprises.
This is the time to review your current practices and to look for opportunities such as the following to generate tax savings—and boost cash flow.
Plan for Capital Losses
If your corporation has capital losses, consider whether it makes sense to trigger these losses to produce a tax benefit. You can use losses to offset any capital gains realized this year. If the result is still a loss, you can then carry the loss back to offset capital gains in the past three taxation years or, alternatively, carry it forward indefinitely.
For corporations, prior taxable capital gains are subject to refundable tax. Therefore, if the corporation paid a dividend in the previous three years, the refundable tax associated with these gains may have already been refunded to the corporation. In this case, it may make sense to carry capital losses forward to apply against future gains.
Utilize Corporate Group Losses
If you have more than one corporation and there is income in one corporation and losses in another (or property with an accrued gain in one corporation and property with an accrued loss in another), consider the following ideas:
- Merge one or more corporations to directly offset income and losses (or capital gains and capital losses).
- Adjust intercorporate interest and expense charges to increase income for corporations that have unapplied losses.
- Prior to selling property with an accrued gain, transfer it to a corporation with unapplied losses; this would allow the corporation with losses to use these to offset the gain.
- Provide an interest-free loan to a corporation with losses in order to enhance its ability to generate income.
Pay Dividends from the Corporation
If you have a corporation that had capital gains in the past or received life insurance proceeds, qualifying companies can pay a tax-free capital dividend now because future capital losses may reduce the amount that can be paid as a capital dividend. Also, if your corporation has refundable tax on hand, paying a taxable dividend to trigger a refund of this tax in your corporation may make sense, especially if your corporation can pay an eligible dividend.
Review Income Tax Instalment Options
If your corporation’s income taxes payable this year will be lower than 2008, rather than paying tax installments based on last year’s higher income, you can reduce the amount of tax you pay in 2009 by paying installments based on an estimate of this year’s tax obligation.
Be careful not to underestimate taxes payable however, or the corporation may have to pay installment interest and penalties.
Adjust Remuneration Mix
If your corporation’s income this year will be lower than in 2008, review the owner-manager mix of salary and dividends as well as family income splitting opportunities with a view to minimizing taxes on distributions. If your spouse or another adult member of your family is a shareholder in the corporation, for example, it may be possible for him/her to receive tax-free dividends.
Review Opportunities for GST/PST Savings
Many companies inadvertently overpay commodity taxes. When finances are strained, it is more important than ever to ensure your enterprise is not overpaying or overcharging GST and PST. Initiate a tax recovery review to identify potential savings.
Identify Opportunities for Research and Development Tax Cre dits
Many Canadian companies are eligible for generous research and development tax benefits—and are not aware of it. Many businesses that produce new or improved products or processes may qualify for the scientific research and experimental development (SR&ED) program offered by the federal and provincial/territorial governments. Those that do qualify can deduct 100% of eligible current and capital expenditures and can receive investment tax credits of up to 35%, depending upon the company’s level of taxable income and capital. For qualifying companies, these credits are refundable; therefore even if a business is not profitable, it can receive credits in cash. This program is available not only to Canadian corporations, but also for certain proprietorships, partnerships, and trusts.
If you’re not sure whether your company’s activities qualify, consult with an SR&ED specialist who can determine whether they may be eligible, or even structure activities in order that they do qualify.
Review your tax strategies with your accountant as soon as possible. Some simple tax adjustments today could have a significant impact on cash flow for your enterprise tomorrow.
Marco Zuiani is a tax partner with BDO Dunwoody LLP – Burlington, Ontario (www.bdo.ca/burlington). He assists business and not-for-profit leaders and professionals with proactive tax planning. You can reach Marco at (905) 633-4911 or mzuiani@bdo.ca. One of Canada’s leading accounting firms, BDO helps businesses succeed. For more helpful ideas to keep your business healthy and sustainable during the economic downturn, download BDO’s 20 Ideas for Your Business at: http://www.bdo.ca/library/publications/documents/20ideasforYourBusiness.pdf
