Some Year-End Tax-Planning Considerations

Article Abstract:

Allocating profits at year end is a complicated tax issue for most small businesses in Canada. The small business deduction reduces taxes up to $200,000 per year up to a cumulation maximum of one million dollars. However, an amendment disallowing a deduction for taxable dividends reduces its advantages making an unincorporated business look more advantageous. With the corporate distributions tax, the benefits of a dividend versus a bonus need to be evaluated. Additional factors add a variety of factors influencing decisions. Bonuses need to be reasonable, which, in practice, has meant any amount that does not exceed profits. A difficulty arises when one or more shareholders is not an employee and has not contributed to income development. Dividends need to be considered then. To count a bonus a liability in one year, though paid in the next, Revenue Canada requires proof of its true existence in the previous year and payment early in the following year. Documentation is important in providing dividends. Two issues are important concerning dividends - the personal tax position of the individual shareholders and the existence of any refundable dividend tax on hand that would trigger a refund to the corporation. Practical problems are now involved with the common practice of payments throughout the year to the shareholder and later treated as a loan or a bonus. A large payment, creating a large credit balance, early in the year might be a satisfactory solution.

Corporate taxes, Tax planning, Corporations

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The Latest on Investment Tax Credits

Article Abstract:

On April 19, 1983, the Canadian minister of finance announced changes in the investment tax credit regulations that are hoped will accelerate productive investment and job creation in the private sector. Some fear that the incentives proposed will not attract new investors, but just serve as bonuses to those who already planned to invest. There are several categories of expenditures that have rates that change according to variables. A new category is heavy construction equipment. The carryover period is to be extended for tax credits earned after April 19, 1983. Credits on future expenditures can be deducted to the full extent without a $15,000 limit. A carry-back proposal is also included. A refundable credit will be allowed in the year it is earned if it is not used. Another method of recovering unused credits will be a flow-through method to equity shareholders, who can use the tax credit against his or her own tax payable. One concern is that the tax credit will reduce the capital cost of the property in which case its use may be avoided. The investment tax credit is valuable for high-rate credits, marginal for lower-rate ones. The incentives are deemed attractive at little cost to the Canadian government.

Investment tax credit

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Stripped Bonds: An Interesting Proposition

Article Abstract:

The question of the treatment of income for tax purposes as capital gains or ordinary interest income is raised concerning stripped bonds, or those where the bonds and their coupons are sold separately, in Canada. Examples are used to illustrate the mechanics of this problem. The tax treatment is different for a resident and non-resident of Canada. For a non-resident, when the coupons come due, ordinary non-resident income tax would apply under most circumstances. For a Canadian resident, the discount is treated as interest accruing annually. The treatment of stripped bonds disturbingly raises the questions of tax treatment of other deep discount bonds. Questions remain on treatment of subsequent holders. Examples illustrate that the discount only relates to the difference in interest rates at the time of resale. Capital gains tax treatment still seems to be the rule and should be used until it is more clearly defined.

Securities, Securities taxes

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