Get smarter on tax
Excerpt reprinted with permission from The Credit Crunch: a Practical Guide, Grant Thornton LLP, 2008
What’s the issue?
Tax, in its various forms, is usually one of the biggest costs for a business, and you need to look carefully at how to manage that cost and cash flows.
What can you do?
As a general rule, don’t make tax payments any earlier than you need to. Start by determining if you qualify for quarterly as opposed to monthly instalments. For corporate taxation years that begin after 2007, a Canadian-controlled private corporation (CCPC) that meets a number of criteria—for example, the taxable income of the corporation and all associated corporations for either the current or previous year does not exceed the amount that qualifies for the small business deduction ($400,000)*—can make quarterly tax instalments. The ability to make instalments quarterly rather than monthly can be an important cash-flow saving. Regardless of whether your corporation pays tax instalments monthly or quarterly, you should review the amount it has to pay for the current year. If the corporation’s taxable income is going to be lower than the prior year, the required tax instalment payments can be reduced accordingly.
Also, review the balance due date for any remaining taxes for the year. Certain CCPCs who claimed the small business deduction in the current year or preceding year can pay any amount owing within three months after the year-end; otherwise, the tax is due within two months.
Take advantage of cash outflow strategies, such as scheduling bonus payments for shareholders or managing the timing of capital and other expenditures, which may allow you to manage taxable income so it’s not more than the $400,000* threshold.
Larger corporations: you will find your ability to claim the small-business deduction is restricted where taxable capital exceeds $10 million for the preceding year, and any eligibility ceases if taxable capital surpasses $15 million. Corporations with a significant amount of debt financing are particularly vulnerable. If your company’s taxable capital (along with the taxable capital of all associated corporations) is likely to exceed $10 million, determine if there are any strategies available to reduce this amount.
Investigate ways to reduce your payroll costs. It should be possible to restructure pay and benefits packages in a cost and tax-efficient way while at the same time ensuring that employees are properly remunerated and rewarded for their efforts—not just in terms of salary, but via other benefits, such as flexible working arrangements, additional holidays, stock options, employee profit sharing plans (EPSPs), pension and deferred profit sharing plans (DPSPs), etc. If you employ family members, determine if you can avoid Employment Insurance (EI) payments. Often the cost savings from restructuring remuneration packages can outweigh the savings from making staff redundant.
It’s also important that you make payroll remittances on a timely basis. The penalty for late remittances is assessed at a graduated rate, based on the number of days that the remittance is late. For example, the penalty is only 3% of the required remittance amount if the payment is one to three days late, but increases to 10% if it is more than seven days late.
Now’s the time to review your GST/HST and provincial sales tax practices to maximize recoveries and ensure you are not filing earlier than you have to (unless you are in a net refund position). Smaller businesses (under $1.5 million in annual taxable supplies) are only required to file annually. However, you can voluntarily change your filing frequency to monthly or quarterly to take advantage of refund claims if you are generally in an Input Tax Credit (ITC) refund position. As with all taxes, it pays to file your sales tax returns on time. You won’t receive GST/HST refunds if you have other returns, such as corporate or payroll filings, that you haven’t yet filed. The CRA will apply any GST/HST refunds first to your other outstanding tax balances.
The above represent some of the simpler ways to reduce tax costs and improve tax cash flows. There are, however, a myriad of increasingly sophisticated planning ideas that might be suitable if you are considering major commercial transactions or restructuring.
What to avoid?
The last thing you should do is fall behind with your tax payments and other compliance obligations. As well as the few items noted above, there are a number of penalty provisions that can apply. There are penalties for late filing a return of income, increased penalties for repeat offences, penalties for failure to report an amount and penalties for failing to remit adequate income tax instalments. There’s also a penalty for late filing an information return, even when you don’t owe any tax.
The interest rate charged on any amounts you owe to the CRA is 2% higher than the rate the CRA pays on refunds. The increased rate applies to all amounts owing to the CRA, including unpaid taxes, instalments and source deductions.
Finally, to top it all off, amounts paid for penalties and interest are not deductible for tax purposes.
* Reduced federal tax rate increased to $500,000 from $ 400,000. Details: Ministry of Finance, Supporting Small Business