Year-end is fast approaching and as the most stressful time on the calendar, it’s wise to always do whatever you can before it arrives. Here are seven significant ideas for what you can do now, before the end of 2020, that will help you reap all the potential benefits from the corporate tax year 2020.
Increase Loss with Specified Receivables
Identify specific accounts receivable that will not be paid and create an allowance for doubtful accounts that will lower taxable income, or increase loss in 2020 that can be carried back up to 3 years to create a refund.
Write down idle inventory
For inventory that is sitting idle and has lost its value, consider writing down to fair value, this will also lower taxable income, or increase a loss that can be carried back to increase tax refund.
Delay or defer income
Now is a good time to review your income before year end and make any possible adjustments to lower your taxable income. Should your business income be higher than usual, with tax rates decreasing in certain jurisdictions next year, it may be wise to consider delaying the start of new projects until 2021. In addition, determine whether any good or services have yet to be delivered and use the deferred revenue rules to create a tax deduction.
In Quebec for example the small business tax rate will move from 5% in 2020 to 4% for 2021 for small and medium-sized businesses (SMBs) in sectors other than the primary and manufacturing sectors.
Under the provisions of the Income Tax Act (the Act), any amount that is received in a taxation year by a taxpayer in the course of carrying on business that is on account of services not rendered or goods not delivered before the end must be included in computing the taxpayer’s income from the business for the year.
However, where an amount has been included in a taxpayer’s income in accordance with the Act, a relieving provision allows for a deferment of taxation on such unearned income by permitting a taxpayer to deduct an amount not exceeding a reasonable amount as a reserve in respect of
- (a) goods that it is reasonably anticipated will have to be delivered after the end of the year,
- (b) services that it is reasonably anticipated will have to be rendered after the end of the year
Increase business expenses
The flip side to decreasing income is to increase your business expenses. Are there certain office expenses or operating expenses that your business has deferred purchasing? Consider ordering these before year-end to increase expenses and thereby lower overall income. Review the categories of potential business expenses and determine if your expenses are “low” in any one area. For instance, in 2020, many businesses have cut back on advertising, and so now may be a good time to splash a little extra into the promotion of your business.
Stay within the rules for prepaid expenses. Under the accrual method of accounting, for an expense to count towards a 2020 tax deduction, the period of the deduction needs to match the period that the expense was realized. For example, prepaying 2021 rent will not be included as a 2020 tax deduction. For an expense to be deductible in 2020 it needs to be realized in 2020 (office expenses, advertising).
Take advantage of CEBA
Business owners who do not pay employment income and sole proprietors who earn direct income from their business are among those who can still apply for CEBA until March 31, 2021. The amount of this interest-free loan has now been increased by $20,000 to a maximum of $60,000. If the balance is repaid by Dec. 31, 2022, half of the loan amount would be forgivable.
It is important to note that for businesses applying for the CEBA loan under the “non-deferred” expense category, expenses had to be incurred in January/February 2020, or be part of an agreement signed before March 1, 2020.12.10
In addition, for those companies that have received the interest-free loan, the Act requires that the forgivable portion is to be added back to income for tax purposes, in 2020. Or an election is filed to reduce deductible expenses on your corporate return in lieu of increasing income. If the forgiven portion of the loan, is not forgiven due to the fact the required repayment is not made by December 31, 2022, a deduction can be taken in 2022 in the amount of the debt that was not forgiven.
Shareholder Loans
For Owner-Manager Shareholders, money can be taken out of the corporation by way of salary/bonus, dividends and as a shareholder loan. However, for amounts taken out of the corporation by a loan/advance, these amounts will be deemed to be included in income of the shareholder as a dividend, if they are not repaid within 1 year after the end of the taxation year of the lender. Therefore, if an advance was made in 2019, and the advance is not repaid by December 31, 2020 (for a calendar year-end), the 2019 advance will be included in the income of the shareholder in 2020. Also, for the period the loan was held by the shareholder, there should be prescribed interest (currently 1% through Q1 2021) included in the income of the shareholder, if not paid to the corporation.
Therefore, you will want to determine if 2020 is a good year to take the unpaid loan/advance as a dividend, or if you should repay the advance and take the income as salary if it is more advantageous for your own credit history with your financial institution. Likewise, given the level of income taken form your corporation, does it make sense to dividend 2020 advances, in 2020, where you may be in a lower tax bracket, instead of waiting until 2021 when your income levels should pick-up.
These same rules apply for corporate non-resident shareholders, specifically watch loans to sister corporations as they are connected with parent and the loan will be deemed to be upstream, with a deemed dividend and withholding tax arising where the loan has not been repaid 1 year after the year the advance was made. If a deemed or declared dividend is not desirable, and funds cannot be repaid, consider a Pertinent Loan or Indebtedness (PLOI) Election, which will maintain the loan as as an actual loan at specified interest rates. If sufficient interest is not charged on the loan, there will be an income pick-up for the Canadian subsidiary at the PLOI rate of interest, which is currently 4.18% for Q4 2020 (less interest charged). This option exists for non-resident corporate shareholders.
Use companies to benefit each other
For multiple entities where one entity has a loss and the other is profitable, consider loss utilization planning, Nicholas Coburn, President of Strata-G recommends the following approach:
- Reasonable management fees charged
- Transfer of assets and leaseback, creating expense in profitable entity
- Opportunities to amalgamate the entities to utilize the losses in 2021 (where the entities are within the same industry).
- Loss Utilization plan (approved by the CRA):
- Bank provides daylight loan (single day) to entity with losses (LossCo)
- LossCo lends money to Profitable entity (ProfitCo), with interest
- ProfitCo uses money to subscribe for preferred shares of Lossco
- LossCo uses money from shares to repay Daylight Loan
- Interest income to LossCo, Interest deduction to ProfitCo
- Interest income is used to pay dividends on preferred shares to ProfitCo
- Losses utilized over time, without amalgamation.
