Tax refund strategies

Tax planning is a vital part of managing your financial health, and it doesn’t need to wait until the year-end rush. Incorporating strategic tax-saving measures throughout the year can lead to significant benefits. Here are some practical tips for managing your finances with tax efficiency in mind.

 

  1. Review Your Capital Gains and Losses Strategy
  • Offset Gains with Losses: If you’ve realized capital gains, consider triggering capital losses to offset them. This can help avoid higher tax rates, especially for gains incurred after June 25, 2024, where gains over $250,000 are taxed at a higher 66.7% inclusion rate*.
  • Corporate Impacts: For corporations, managing capital gains* is crucial to avoid surpassing the $50,000 passive income threshold, which can claw back your small business deduction (SBD). Offsetting gains with losses could save up to 12% in taxes on active business income for those in Alberta for example.
  • Carry Forward or Back: Capital losses can be applied to the current year, carried back three years, or carried forward indefinitely.
  • Business Sales: If you’re selling a business, consider spreading the taxable gain over five years using the capital gains reserve, especially if a sale of qualified shares exceeds your Lifetime Capital Gains Exemption (LCGE).

 

  1. Explore Allowable Business Investment Losses (ABILs)

ABILs apply to losses from disposing of shares or debts in a Canadian-controlled private corporation (CCPC). These losses can offset any income type, providing more flexibility than regular capital losses. Ensure the loss meets CRA criteria.

 

  1. Make Tax-Efficient Charitable Donations
  • Donate Appreciated Securities: Donating investments with significant gains allows you to avoid capital gains tax while receiving a tax credit.
  • Corporate Donations: Corporations donating in-kind securities benefit even further. On top of the donation receipt the corporation will receive, 100% of the capital gain gets notated to the capital dividend account (CDA).

 

  1. Optimize Registered Accounts

Tax-Free Savings Account (TFSA)

  • Planning a withdrawal? Do it before year-end to restore contribution room on January 1.

First Home Savings Account (FHSA)

  • Open an FHSA before year-end to generate $8,000 of contribution room which can be carried forward a year.
  • Accelerate your home savings by contributing to your FHSA before year end to reduce your 2024 taxable income.

Registered Education Savings Plan (RESP)

  • Maximize the Canada Education Savings Grant (CESG) by contributing at least $2,500 per child. Catch up on unused grant room if available.

 

  1. Plan RRSP Contributions and Withdrawals
  • Contribution Deadline: The RRSP contribution deadline for the 2024 tax year is March 3, 2025.
  • Spousal RRSPs: make contributions before year-end to reduce the time needed to clear income attribution rules on withdrawals.
  • Age Considerations: If you turn 71 this year, ensure you roll your RRSP over to a RRIF prior to year end. Consider making an advanced contribution to your RRSP prior to conversion if you will generate additional room for 2025. Remember, over contributions are subject to penalty, but this overcontribution will only last until January 2025.

 

  1. Manage Non-Deductible Debt

A debt-swap using income-earning investments can help you save money by converting non-deductible interest (eg., on mortgages or consumer debt) to deductible interest.

 

  1. Identify Income-Splitting Opportunities
  • Prescribed Rate Loans: Consider a prescribed-rate loan to a spouse or common-law partner. The 2024 prescribed rate is 5%. Ensure proper documentation and timely interest payments.
  • Second Generation Income: Monitor assets gifted to family members, as income attribution rules don’t apply to second-generation income.

 

  1. Optimize Corporate Ownership Strategies
  • Tax-Efficient Loans: If your corporation provides no or low interest loans to employees or shareholders, the 2024 taxable benefit rate is 5%.
  • Deferred Bonuses: Declaring bonuses in 2024 you can defer payment up to 180 days, permitting a personal tax deferral to 2025.
  • Compensation Mix: Review your mix of salary and dividends. Dividends can be further classified into eligible, ineligible, and capital for tax efficiency.
  • Shareholder Loan Repayments: Repay loans borrowed from your corporation within the two-year window to avoid inclusion in personal income.

 

Final Thoughts

Tax planning isn’t just a year-end activity; it’s a year-round process that integrates your business and personal financial goals. Reviewing these strategies with your financial planner, tax accountant, and lawyer ensures alignment with your unique situation. Small adjustments today can yield significant long-term benefits, so start your planning early and review it often. Contact us at 780-261-3098 or email (Roxanne@C3wealthadvisors.ca) to set up your next conversation.

*note that this tax change has not yet been made into law. The 66.7% inclusion rate also applies to all corporate capital gains and losses as of June 25, 2024.

Roxanne Arnal is a CFP®, former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial and tax planning. Individual circumstances and needs vary. Tax strategies should also be discussed with your tax accountant and lawyer. Errors and Omissions exempt.

 

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.


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Taxes C3 Wealth article

In recent years, the landscape of Canadian small business taxation has undergone significant changes, particularly concerning the small business deduction (SBD) and its interaction with passive income. Understanding these changes is crucial for small business owners who rely on the SBD to reduce their tax burden and promote growth.

What is the SBD?

The SBD is a tax benefit on the first $500,000 of active business income (ABI) in a Canadian-controlled private corporation (CCPC). This reduction is designed to help stimulate business growth and job opportunities.

The Tax Advantage of the SBD

The current combined federal and provincial corporate tax rate on income eligible for the SBD is 11% in Alberta. This represents a 12% tax savings compared with the general rate income pool (GRIP) tax of 23% on active income.

Changes in Corporate and Personal Taxation (2018)

In 2018, the Canadian tax system underwent significant adjustments aimed at achieving greater integration between business and personal taxation. This overhaul primarily affected business owners and their comparison to salaried individuals, creating a near-perfect tax alignment.

2018 Tax Changes Affecting the SBD

The 2018 federal budget introduced significant changes to the impact of passive income within corporations. If passive income exceeds $50,000 in a given year, a clawback* begins on the $500,000 of eligible ABI for the SBD.

Understanding Passive Income

Passive income includes interest, dividends, and capital gains. The taxable portion of these forms of income is termed adjusted aggregate investment income (AAII).

How is Corporate Passive Income Taxed?

Following the 2018 tax changes, corporate passive income as AAII is currently taxed at a rate of 46.7% in Alberta (combined federal and provincial rate).

The Tax Impact is Greater after June 25, 2024

In 2018, at the time of “near perfect integration” the capital gains inclusion rate was 50%. This means that 50% of the gain was deemed taxable as AAII. On June 25, 2024 the capital gains inclusion rate for corporations was increased to 66.7%, making it easier to surpass the $50,000 threshold, thereby affecting SBD eligibility.

How SBD Erosion Works

For every dollar of ABII that exceeds the $50,000 threshold, SBD eligibility is reduced by $5*. Once passive income surpasses $150,000 in any given year, the entire SBD on active income is eliminated.

Example of SBD Erosion in Alberta

Consider a scenario where a corporation has $500,000 in taxable active business income. Without any investment income, the corporate tax bill would amount to $55,000.

If this corporation also has $100,000 of ABII**, which exceeds the $50,000 threshold, the SBD rate of 11% will apply only to $250,000 of active income, with the remaining $250,000 taxed at the GRIP rate of 23%.

SBD Tax on $250,000: $250,000 × 11% = $27,500

General Rate Tax on $250,000: $250,000 × 23% = $57,500

Total Tax Bill on Active Income = $85,000 which is $30,000 MORE than if the corporation had passive income less than $50,000!

**this example does NOT include the tax bill on passive income. To see examples for other provinces and the tax on passive income visit our website to access a simple calculator.

A Complex Conversation

Navigating investment and divestment strategies within your corporation has become increasingly complex due to ongoing tax changes. A holistic financial plan that integrates both business and personal aspects of your wealth and taxation is essential to empower you in your financial journey.

It is never too early or too late to initiate your financial planning. Contact us at 780-261-3098 or email (Roxanne@C3wealthadvisors.ca) to set up your next conversation.

 

*Note: Ontario, Quebec and New Brunswick provincial tax calculations do not mirror the federal rules for the SBD clawback.

 

Roxanne Arnal is a CFP®, former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial and tax planning. Individual circumstances and needs vary. Errors and Omissions exempt.

 

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.


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Annually we take our corporate financial documents to the accountant and about 90 days later we return to pick up the financial statement. We meet with the accountant who highlights a few aspects, tells us how much tax we owe and present their invoice for payment. Often we walk out thinking “I have no idea what he was talking about”. We proceed to pay the taxes and the invoice and then file the package away until next year.

The reality is that to be an effective business owner and build up a practice that have value beyond you being the doctor, you need to understand the document.

When you measure something you begin to have control over it. You have the ability to impact change and increase the value of what is likely your largest material asset.

So today, a quick preliminary lesson on your corporate financial statement.

The Balance Sheet
This is the overall financial picture of your business. It represents your assets (good things the business has) and your liabilities (the money you owe).

To make these two numbers match, the shareholder’s equity/deficit section includes the retained earnings (deficit). This is how the balance sheet balances what you have in the business.

Assets
Assets are typically separated into Current Assets, Long Term Investments, and Property & Equipment.

Current assets are those items that are typically easily accessible or readily available to turn into cash. This section will include the money you have in your bank accounts at year end (cash) and the money other people owe you (accounts receivable). Here is where you will also find your inventory value.

Other assets will typically make reference to “Notes”. The Notes section is where additional details are laid out related to the items listed. On the Asset side, these often include any long-term investments like the art you may have on your office walls, and corporate owned life insurance cash values.

Corporate owned marketable securities (investments) will also be listed in one of these categories.

Property & Equipment is sometimes listed as Capital Assets depending on the accountant. In any event, these are larger cost items that are subject to depreciation schedules. Depreciation is how the value of a capital asset is reduced over time as you use it. More details on the depreciation of an asset class can be found in the Notes to the Financials as well.

If you purchased the corporation from someone else, you likely paid a soft fee called Goodwill. Goodwill represents the value of the business that was attributed to the none-numerical value of the business assets at the time of purchase. This often represents the good reputation and value of repeat business for a corporation.

Liabilities
Liabilities refer to the money you owe, or in this case, the money your corporation owes someone else. This might include banks, yourself (shareholder loan), taxation, utility companies, etc. You get the idea.

Shareholder’s Equity
Shareholder’s equity is generally made up of two parts. Share capital refers to the amount of cash the shareholder’s paid to buy their shares of the corporation. For most of us, this is a nominal amount.

Retained earnings refers to the numerical value you have created in your company. If this is a deficit, it means you owe more than your company assets are worth. In other words, if you sold everything at current valuation, you would still have outstanding debt.

The Income Statement
This is where you will see the revenue that the corporation brought in during the past year. For most optometric practices, the cost of goods will be taken off this value to create what is called the Gross Profit, or “how much money you made before you had to pay for expenses”.

Operating expenses are then listed – either in alphabetical order (gosh I wish all accountants listed it this way), or from highest to lowest cost amount. There are general classifications of expenses that most accountants use based on the tax rules with each item.

Once you subtract out the expenses from your gross profit, you are left with “Earnings from Operations”.

Next comes the broad category of “Other Income” which typically represents revenue generated from your investments and any rental income you collected.

Note that rental income will appear here for most optometrists because being a landlord is NOT the main business of your corporation. These are listed separately because (a) they are not derived from the active business activities of the corporation, and (b) because they are taxed at a different rate.

This brings you to “Earnings before Income Taxes”, then “Income Taxes” and finally “Net Earnings” or “Net Income”. This is the final measure of how profitable your business was during the year.

Bank Accounts
So how come the “net income” amount isn’t what is in your bank account?

Glad you asked. The biggest reason is often that net income is impacted by “Amortization and Depreciation”, yet your bank account may have paid for the asset (think “piece of equipment”) with cash. Here is where we open up the conversation to leasing vs loan vs cash purchasing. That is a bigger topic for another day.

Dividends
If you elect to take dividends (profits) out of your company, these will be deducted from your net income, after taxes are paid, and will appear on your financials before the balance of your earnings are counted towards your retained earnings on the balance sheet.

Notes to Financials
The notes section should provide additional details about various line items on both your balance sheet and income statement. They will outline the total cost of equipment, how much has been claimed under depreciation, and what the net value of that equipment is now. These are generally lumped into different categories based on their tax treatment.

Computer equipment for example, depreciates at a much quicker rate than optometric equipment, because computers have a very limited life span on them. Having said that, even if your exam room equipment has been depreciated down to $1, it likely still has a greater resale value.

The net book value simply refers to the value of the asset from a tax perspective. Generally speaking however, if the net book value of an asset is $1, that might be all someone is willing to pay you for it. And then we come to the subject of determining a selling price for your practice, another big topic!

Advisory
As your Chief Financial Officer, I’m here to help you understand the money things in your business and personal life.

Have more questions than answers? Educating you is just one piece of being your personal CFO that we do. Call (780-261-3098) or email (Roxanne@claritywealthadvisory.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission Empowering You & Your Wealth.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.


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