TSG (Tax Specialist Group) - Year End Planning (Year End Planning)

This is the time of year that you should be reviewing your clients' corporate and personal tax affairs with a view to implementing a shareholder remuneration strategy. No matter whether your client has a calendar or non-calendar fiscal year end, the calendar year 2014 is relevant for purposes of determining whether bonuses should be paid and T4’d in the year and whether dividends should be declared and T5’d in 2014.

Considerations to take into account will include, among other factors:

The status of your client’s shareholder loan account;
The balance in the corporation's capital dividend account;
Whether there is paid up capital in the issued shares;
Your client's personal cash needs;
The ability or potential to income split with other family members; and
The effective corporate tax rate.

In 2014, the Federal Government introduced measures to reduce the gross-up and dividend tax credit for “other than eligible dividends”, paid by a Canadian-Controlled Private Corporation (“CCPC”) to a resident Canadian shareholder. The effect of this change was to increase tax rates on these types of dividends for 2014. In Ontario, the highest rate on these dividends will be 40.13% instead of the 2013 rate of 36.47%.

In most provinces, integration will not work as efficiently in 2014 as it did in prior years. Practitioners may therefore want to re-think the dividend vs. salary issue. In some provinces bonuses will be better than dividends, while in others the reverse will be best. There is no one right answer. Remember, shareholders should consider extracting funds for personal use in the form of repayment of shareholder loans, tax free returns of paid up capital or tax free capital dividends where these options exist. Also, paying a dividend to a low-rate family member who is over 18 may be an option. If such family members are not shareholders, consider creating a family trust to allow for this type of income-splitting and other tax savings in the future.

Since the proper remuneration strategy should be determined and documented on a timely basis, it is better to start planning now, rather than waiting for December 31st to arrive.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.