Tax Planning

Tax planning on the finish of the yr: entrepreneurs and workers – taxes

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Tax planning at the end of the year: entrepreneurs and employees

The COVID-19 pandemic has caused major disruptions in our daily lifestyles for most of the year. There have been some eases in the tax world, including extending some deadlines for filing taxes. But some things never change. Taxes always have to be paid at some point, and the Canada Revenue Agency has not stopped working to collect them. Hence, it is still important to do some planning to minimize the tax burden when due. With this in mind, and before we leave 2020 behind, let’s look at some end-of-year tax planning strategies for entrepreneurs and employees before the tax return for April is due again next year.

Tips for entrepreneurs

1. Submit a tax return

Many new businesses are starting up losses in the first few years, especially for 2020 as the pandemic hits the bottom line for everyone involved. If you run a business personally, you should provide feedback for each year, including the years of loss. This is because the loss of your business can be used to reduce income from other sources in the current year, or it can be carried forward three years back and 20 years. The loss diminishes income from any source – be it the business itself, employment – even capital gains. To claim the loss, you need to file a tax return for the year.

The end of the year for a person who is a sole trader or an active partner in a partnership established since 1995 is December 31st. Self-employed taxpayers and their spouses (if not separated) have until June 15th to file a tax return, although taxes are due. Debts must be paid by April 30th.

2. Lower your tax rates

If you are paying tax on an installment basis, you have likely received several notices from the rating agency informing you what your installments should be. If your income has been going down in recent years (and probably for 2020), think twice before filing your check.

CRA’s rate calculations are based partly on your income tax position two years ago and partly on the previous year. Instead of using the credit rating agency’s method, you are legally entitled to base your rates on last year’s tax position. You can even base your rates on the current year’s estimated tax position, if that’s lower. However, be careful in this case. If you underestimate your taxes and your rates are lower than the other two required options, penalties may apply.

If your income has been going down over the past few years, using either of the other two options may mean you can cut your quarterly payments without incurring interest penalties. However, if you underinstall, the CRA will charge you interest. The interest rate is currently 5%. However, this rate is calculated daily. Worse, it’s not deductible. So this is an expensive way to improve your cash position. An interest surcharge of 50% is charged for serious installment payments.

If over the course of the year it turns out that you have paid more installments than you need, you can consider the option of deliberately failing to adhere to the installment plan by paying poor or late payments. In fact, that’s pretty “legal”.

By the way, if you over-installed or prepaid, CRA will give you a credit (called an “offset” or “counter interest”) on interest for late or inadequate payments for the year. Basically, the rule works as if you had deposited the installment into a bank account and earned interest (at the rates mandated by CRA – currently 3% for individuals and 1% for businesses) if the installment is premature or excessively high. These “credits” can then be used to claim interest penalties for poor or late payments. The downside of this, of course, is that you can lower the interest burden for a late or inadequate tax rate by overpaying other rates or paying them before their due date.

3. Deductions

The deductions for most normal business expenses are based on whether the cost was incurred by the end of the year rather than whether the item was actually paid for; B. Office supplies, auto and other repairs, etc. Exceptions are compound interest charges – regular (“simple”) business interests can be expensed when payable, site surveys and utility connection charges, and disabled equipment and building modifications

Consider expediting purchases of equipment, capital, and other expenses before the end of the year. Examples include car and equipment purchases (half of the normal depreciation can be claimed this year – the full depreciation rate is claimed next year), car repairs, etc. Note: Although the depreciation rules limit depreciation on capital purchases, you can apply for the year of purchase apply for a full GST credit. So if you buy by the end of the year, the balance can help reduce the GST you owe.

If you “accumulate” a salary for family members (this must be reasonable in relation to the business service they provide), you can claim a deduction as long as you actually pay the cost within 179 days of the business year. This may allow the recipient to defer tax on the amount until next year.

Tips for employees

Some may think that as an employee, your ability to plan taxes and lower your taxes is somewhat limited. However, where there is a will, there is a way.

1. Reduce your withholding deductions

For employees, an unlikely source of cash could be the withholding deductions that are withheld on your paycheck. Many people regularly receive tax refunds due to deductions such as allowance payments, investment fees, etc. If you are one of them, call the human resources department of your local tax office. Tell them you want to apply for a Withholding Reduction under Section 153 (1.1) of the Income Tax Act (if you include the section number, they know you mean business). They’ll send you a form and ask for information to secure your application. If you do, they’ll likely cut your withholding tax so you can pocket the money. Most tax offices are quite cooperative in this process.

According to the CRA, there is no specific minimum amount below which an application will not be considered. Although technically you’re supposed to show that you’re in hardship without a reduction, the CRA seems to be pretty straightforward about meeting that requirement.

One point that can lead to a reduction in withholding deductions is an RRSP contribution for the beginning of 2021. If you make a contribution at the beginning of the year, it also means that your income will increase sooner rather than later for tax protection.

Warning: If you are basing your application on a tax authority, questionable deduction, or other aggressive tax planning, a request for reduced withholding deductions may result in undesirable scrutiny. Better to leave it alone well enough.

2. Defer income

If possible, you should postpone receiving your earned income if your tax bracket will be lower in 2021.

3. Debt write-off

Employees are entitled to a capital cost allowance (CCA) for automobiles, aircraft, and musical instruments, depending on the circumstances. If you are eligible to withdraw CCA and you are considering buying a new asset, do so before the end of the year. This will accelerate claims for a flat rate cost of capital by one year. The asset must actually be available for your use to qualify for a CCA claim.

4. Reduce the vehicle operating cost tax

If personal use of a company car is less than 50%, you should notify your employer by December 31 if you would like the taxable operating expense benefit based on half the standby fee minus the reimbursements you paid. Other ways to reduce your business benefits are by reimbursing your employer for operating costs, reimbursing 100% of the personal use’s share of actual operating costs to your employer, and minimizing your personal driving.

5. Reduce the standby charge

Standby charges are calculated based on the original cost of the vehicle. After a few years, when the vehicle is worth less, you should buy it from your employer to avoid the high standby fee. Alternatively, let your employer sell the car and buy it back or rent it back, or choose a cheaper car.

Originally published by The Fund Library

The content of this article is intended to provide general guidance on the subject. You should seek advice from a professional about your particular circumstances.

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