I followed up in April, with a post on some potential planning to address the creeping RRSP liability. Today, I discuss some planning and considerations to reduce the creeping corporate tax liability you may be accruing.
Corporate Tax Attributes
Many corporations have built up corporate tax attributes that can be accessed prior to retirement or in retirement that can reduce the tax liability related to you and/or your corporation. I discuss these below.
Repayment of shareholder loans owing to you and other shareholders is the most tax efficient way to remove funds from your corporation on a tax-free basis.
Capital Dividend Account
If your corporation has a capital dividend account ("CDA") balance, paying out capital dividends is a great way to remove funds on a tax-free basis and reduce your ultimate corporate tax liability (Non-resident shareholders are subject to withholding tax on capital dividends). See this blog post I wrote for all the details of a capital dividend account.
For some unknown reason, many corporations do not pay out tax-free capital dividends from their CDA on timely basis. Since this account is a "moment in time" account, this can prove very costly if you incur capital losses. For example, if your corporation had previous capital gains and the CDA balance is say $100,000 today, but the corporation incurs capital losses of say $60,000 tomorrow, the CDA account will be reduced by $30,000 to $70,000. Thus, your corporation will have forgone $30,000 in tax-free dividends if the capital dividend had been paid before the capital losses were incurred.
Due to the poor stock markets this year, you may be triggering capital losses as part of the corporation's investment and/or tax planning. Discuss paying out a capital dividend with your investment advisor and accountant before triggering any capital losses this year.
Refundable Dividend Taxes On Hand
Your corporation may have balances in the following two notional accounts: Eligible Refundable Dividend Tax on Hand (ERDTOH) and Non-Eligible Refundable Dividend Tax on Hand (NERDTOH). These accounts are the successor accounts of what was formerly known as Refundable Dividend Tax On Hand (RDTOH). These accounts are essentially prior years corporate taxes paid that are refundable when the corporations pays dividends to the shareholders. The accounts act as a mechanism to ensure that you and your corporation are not double taxed.
While your corporation needs to pay a taxable dividend to trigger refunds from these accounts (the rules are confusing, speak to your accountant), the government essentially pays your corporation a refund somewhat equivalent to the personal tax you owe on the dividend, so you net out much better than if you paid a taxable dividend with no refundable tax.
Return of Capital
If your corporation has “hard” paid-up-capital (“PUC”) for money you previously paid to purchase corporate shares from treasury, you should be able to return most of the PUC tax-free.
Payment of Wages
If you have family members who work in the business and are not paid a salary or are paid a very low salary, consider paying them a “reasonable salary”. I say reasonable, as the CRA requires a salary to family members to be reasonable to be deductible.
Tax on Split Income Rules
The Tax on Split Income Rules (“TOSI”) rules are very complicated and far beyond today’s brief discussion. However, in general, TOSI will not apply on amounts paid to a business owner’s spouse or common-law partner, who are inactive in the business, so long as the business owner has reached age 65 during the year. This will be the case where the amount would have been excluded from TOSI had it been received by the business owner directly, by virtue of the fact that they would have otherwise met another exclusion. So, an inactive spouse whose shares were subject to TOSI before the business owner turned 65, will in most cases, now be able to receive dividends on their shares without the TOSI rules applying. It may also be possible to reorganize the company when the business owner turns 65 to provide shares to the inactive spouse.
Tax Reorganizations/Tax Planning
If you have a successful corporation (especially an active corporation), your accountant or tax lawyer may have one or two reorganization/tax plan ideas to consider that could possibly lower your creeping tax liability. The Federal budget in April this year contains proposals to limit a couple of these planning ideas, so you should speak to your accountant to review whether there are any planning opportunities still available that may work for you and your corporation(s).