Top 5 year-end tax considerations for private companies

Contributing Author: Sanjaya Ranasinghe, Partner, Tax 

Questions private business owners should consider when identifying saving opportunities in 2020

If you’re a Canadian private business owner, you can reduce your balance owing and increase the potential for a refund by preparing for your tax return now instead of waiting until April. Consider these five questions to identify savings opportunities on your 2020 tax bill and beyond.

1. Do you have an opportunity for estate planning and freeze transactions? The values of many private corporations have suffered during the COVID-19 pandemic. This may present an opportunity to “freeze” the value of your company at the current depressed prices and undertake planning to transfer the future growth value of the business to family members and possibly defer the payment of tax on that future growth for an extended period of time.
2. Have you considered the impact of changing provincial corporate tax rates in 2020?
   Generally, a corporation resident in Canada will be subject to provincial or territorial tax where it has a permanent establishment. A permanent establishment can include such things as an office, factory or warehouse, or where a corporation carries on business through an employee or agent.
   
   If a corporation has multiple permanent establishments in Canada or selects a jurisdiction for a new permanent establishment in Canada, differences in corporate tax rates between the provinces may provide an opportunity to reduce the company’s overall effective tax rate. For example, effective July 1, 2020, Alberta’s provincial corporate tax rate applicable to general rate and investment income is 8%. This is approximately 30% less than the equivalent rates in Ontario and Québec, and 50% less than Prince Edward Island.
3. Have you considered the payment of dividends to recover corporate refundable tax? A Canadian-controlled private corporation that earns investment income during the year may be subject to a corporate refundable tax. This refundable tax balance is tracked through the “eligible refundable dividend tax on hand” (ERDTOH) and “non-eligible refundable dividend tax on hand” (NERDTOH) balances. If you have an ERDTOH balance, the payment of an eligible dividend should result in a corporate refund of refundable tax. The same should apply to the payment of a non-eligible dividend if you have a NERDTOH balance.
   
   It would be prudent to keep in mind available ERDTOH and NERDTOH balances in determining the form and amount of annual remuneration.
   
   Residents of Alberta should consider paying eligible dividends in 2020. The personal tax rate applicable to eligible dividends for residents of Alberta is expected to increase to 34.31% in 2021 from 31.71% in 2020, which corresponds with the reduction of general corporate tax rates in Alberta. If you’re based in Alberta you may want to consider accelerating the payment of eligible dividends to 2020 where possible. This would be especially beneficial if the payment of an eligible dividend results in a refund of your ERDTOH balance.
   
4. Do you have employees working from home? Many employees have been tasked with working from home due to the pandemic. As a result, employees have incurred additional expenses on everything from office furniture to higher utility bills.
   
   As announced in the November 30 economic statement, the Canada Revenue Agency (CRA) will permit a simplified deduction of up to $400 for employees working from home due to the pandemic. The CRA will generally not require a Form T2200, Declaration of Conditions of Employment, or other documentation to support this deduction.
   
   For employees who have incurred more than $400 for home office or other expenses directly related to the performance of their employment duties, it may be possible to deduct these costs. This deduction, however, is contingent on several things, including that an employer has completed Form T2200, although it’s possible the CRA may relax this requirement with respect to home office arrangements related to COVID-19. For more information, see EY’s May 2020 article, Could home office quarantine mean home office deductions?
   
   As an alternative to deducting the costs of home office expenses, the CRA has stated that a reimbursement of up to $500 for all or part of the cost of purchasing personal computer equipment to enable an employee to work remotely due to COVID-19 should be considered a tax-free benefit if the purchase is supported with receipts. This position would be expanded to include home office furniture such as desks and chairs if the employee needs them to work from home. This may also provide a convenient way of avoiding the logistical issues associated with having to complete a Form T2200 while still helping employees work from home during the pandemic.
5. Have you thought about prescribed rate loans? Given the difficulty and complexity of dealing with the rules around the tax on split income, many taxpayers are considering the use of a prescribed rate loan to split income with family members who are subject to a lower marginal rate. For loans made after June 30, 2020, the prescribed rate is 1%. This rate will apply for as long as the loan remains outstanding, even if the prescribed rate increases in the future. If you’d like to pursue this type of planning, be mindful of the timing and form of interest payments to avoid the income attribution rules.