Hard to believe that we are so close to the end of 2018! There have been some big tax changes that came into place this year for business owners and there is another one coming in 2019.
Business owners are very busy, especially this time of year, and you have to remember that not only do you have a business year end, which might not fall on December 31st, but you have a personal year end that does end that day. Proper planning and strategies need to be implemented now to make the most of 2018, but to plan for the years going forward.
Without going into big long technical details as to what is changing, how it is changing, etc, (that’s more of a one on one conversation) there are a couple of small strategies that are simple to implement and that make tax deferral sense. The sooner you start, the more tax dollars saved, and it’s a great way to start off 2019.
Near the end of the year is when business owners will typically pay out dividends to themselves and a spouse. With the new income splitting rules we need to do an evaluation on whether or not you will qualify. I’ve had some business owners say they are still going to do it regardless. As long as you are aware of the HIGH penalty for getting caught, then by all means, go ahead. Alternatively, there are cash flow strategies that you can use in order to reduce the need for the previous higher dividend disbursement. For example, if you have young children and are contributing to an RESP, there might be a better long term solution than funding that out of paid dividends, which will result in keeping more tax dollars in your pocket. Don’t worry, with the proper plan there will still be money for your child’s education!
The next thing to plan for is the new passive income rules for small business owners and how they are going to impact you going forward. We want to preserve your small business deduction as long as possible. The sooner we start planning this, the easier it is. You don’t want your investments to all of a sudden do really well next year resulting in the sudden loss of your deduction. Investments have to do REALLY well for the increase in your investments to compensate for your higher tax rate. It is also important to remember that if your company has invested in and owns rental properties, rental income is considered passive income.
A few strategies we take a look at:
- Tax-free withdrawals – is there money that can be withdrawn from the corporation on a tax-free basis that would otherwise be invested in the corporation. (Shareholder loans being repaid.)
- Life Insurance – there are numerous reasons to hold life insurance policies inside of your corporation rather than personally. Depending on the structure and size of your corporation, even something as simple as eliminating the mortgage life insurance off your mortgage at the bank and owning one inside of your corporation can have compound tax saving benefits over the years. (Do not cancel your mortgage life insurance without your new policy in place, if this is a plan you decide to go with.) This is a cash flow strategy that is very effective. Also, qualifying permanent life insurance policies can also be an alternative investment solution when there is concern that investment growth inside of the corporation will limit or eliminate the SBD.
- Investment Strategies – every company is different and we need to take a look at if the best solution is to continue investments inside of the corporation, use RRSP’s/TFSA’s, or create an IPP.
There is not a one size fits all. There are other strategies that can be used as well. You will have to work with both your Accountant and your Financial Planner on the right solution for you and your company. Don’t just take a friend’s advice on this kind of stuff because “that’s what they did/heard”. It could be very costly! And your Accountant would love to hear from you this time of year. As one of my colleagues says, as of December 31st accountants become historians. Do your part and give them more to work with.
Do make sure you take the time to plan! Fail to plan, plan to fail. We are always so busy working to make money, take a bit of time to make sure that you keep it.