Year-End Tax Planning for Business Owners - Consider Taking a Salary
Our team at Clearly Financials would like to offer some year-end tax-planning tips for small business owners in the Edmonton Area.
December is an important month when it comes to deciding how your business will compensate you in the calendar year. The amounts that your corporation pays you from January 1 to December 31 will be reported on your personal tax return.
It is important to finalize your planning soon!
If you are a business owner who wants to increase your earned income (salary) from your corporation, make sure to declare and pay a bonus by December 31st, 2022.
Source deductions, including CPP and withholding tax, would be due by January 15th, 2023.
The deadline to file tax information slips, including T4s and T5s, to report salary and dividends that your corporation has paid in 2022 is February 28th, 2023.
Small business owners may decide to compensate themselves primarily through salary or dividends. The combined income tax (corporate + personal) is roughly equivalent between the two options. Business owners may favour one method over the other.
If you are a small business owner that earns mostly dividends from your corporation, consider increasing your salary if one of the following situations applies:
You have young children and incur childcare expenses;
You are considering moving your home; or
You would like to contribute enough to the Canada Pension Plan to qualify for disability benefits if required in the future.
For business owners with young children, it may be a good idea to ensure that you have some salary earned from your corporation. The Canadian government wants to encourage parents to be active in the workforce. As such, parents may be able to deduct childcare expenses if the expenses were incurred so that one of the parents could:
Operate a business;
Attend school under certain conditions; or
Conduct research for which a grant was received.
“Consider taking a salary from your corporation if you incur childcare expenses.”
When it comes to the decision between “salary vs. dividends,” it is important to note that childcare expenses may be deducted against income from employment (salary) and not income from investments (dividends). Therefore, business owners that prefer dividends may want to consider earning enough salary to fully deduct their childcare expenses.
Basic Annual Limit for Each Child for Childcare Expenses
There is an annual limit that may be claimed per child depending on age, and the child may be eligible to claim the disability amount.
Basic Limit (2015+)
Age 6 or less at the end of the tax year (no impairment, and disability amount cannot be claimed)
Age 7 to 15 at the end of the tax year (no impairment, and disability amount cannot be claimed)
Age over 15 at the end of the tax year, with a mental or physical impairment (disability amount cannot be claimed)
Any age, for whom the disability amount can be claimed
Annual Limit Based on Earned Income
The claim for childcare expenses cannot exceed two-thirds of your earned income (salary) in the year.
Example of Annual Limit
If you have two children, aged 6 and 8 at the end of the calendar year, your basic
annual limit for childcare expenses would be $13,000 ($8,000 + $5,000).
Your earned income (salary) must be at least $19,500 in order to fully utilize the
childcare expense claim (two-thirds of $19,500 = $13,000).
Which Parent Can Claim Childcare Expenses?
The lower-income-earning spouse must claim childcare expenses in most cases. Make sure to factor in the earned income of your spouse or common-law partner in your planning. This applies even if your spouse or common-law partner is not the biological parent of the child.
There are exceptions where the higher-income-earning spouse may claim the childcare expenses if the other spouse is incapable of caring for the child due to physical or mental infirmity.
In shared custody situations, each parent may claim a portion of the childcare costs, but the total limit per child still applies.
There are regulations on what is considered to be an eligible child care expense.
The CRA has a specific definition of an eligible child.
There are many factors to consider. Please book a meeting with one of our team members if you would like further support on how childcare expenses work.
Visit the CRA's page on Child Care Expenses for more information.
If you have moved your home, you may be eligible to claim moving expenses on your personal tax return.
One consideration that applies to small business owners is that moving expenses cannot be deducted against investment income, including dividend income. Therefore, if you have moved, or are moving soon, you may want to consider earning some salary from your corporation.
Am I Eligible to Claim Moving Expenses?
Generally, you can claim moving expenses if you meet two conditions:
You moved for the purpose of work, running a business, or studying full-time;
Your new home must be at least 40km closer to your new work location or school.
Moving expenses may be deducted from the amount you earned at the new location.
Tip: In many cases, moving within the same city will not be worth claiming moving expenses. On the other hand, if you hired a private moving company or moved a long distance, this deduction can be very valuable.
Unused Moving Expenses May be Carried, Forward
If you have already moved and were not able to deduct your full moving expenses, you may be able to carry forward and deduct the unused portion of moving expenses in the following years.
What are Eligible Moving Expenses?
Eligible moving expenses include:
Transportation and storage costs for household items;
Travel expenses including vehicle expenses, meals, and accommodations to move you and your household members to your new home (you may be able to claim some of these expenses, even without receipts);
Temporary living expenses for up to 15 days if you needed temporary lodging near your new or old home;
Cost of cancelling your lease
Incidental costs which include:
o Changing your address on legal documents
o Replacing driver’s licenses, and
o Utility hook-ups and disconnections
Costs to maintain your old home when vacant (up to $5,000), including:
o Property taxes
o Insurance premiums
Costs to sell your old home including:
o Legal fees
o Real estate commission
o Mortgage penalties
Costs of buying your new home, if you sold your old home because of your move, including:
o Legal fees
o Land titles registration
Clearly Financials is pleased to provide you with a worksheet which outlines eligible moving expenses.
Visit the CRA's page on Moving Expenses for more information.
Canada Pension Plan Disability Benefit
If you are 18 to 65 years of age, and cannot regularly work at any job because of a severe and prolonged physical and/or mental disability, you may be eligible for the CPP disability benefit.
The CPP disability benefit is a monthly benefit paid to CPP contributors who meet the minimum contributory requirements. The more you earn and contribute to the CPP, the higher your payment will be. Small business owners should consider earning a salary from their business, and contributing to CPP, in order to qualify for CPP disability in the future.
Tip: We recommend drawing an annual salary equal to at least 10% of the Maximum Pensionable Earnings, please see the table below for rates. For 2023, 10% of $66,600 would equate to an annual salary of at least $6,660.
What are the minimum contributory requirements?
To meet the minimum contributory requirements, you must:
have made valid contributions to the CPP in 4 of the last 6 years, or
have contributed for at least 25 years, including 3 of the last 6 years, or
meet the requirements for the late applicant provision
You automatically contribute to the CPP, based on what you earn above $3,500 to a maximum annual amount. This annual amount is called pensionable earnings. The maximum amount is set each January, based on the average wage in Canada.
You do not contribute to CPP:
while you receive CPP disability benefits
during periods when you have no earnings, or
when your annual earnings are $3,500 or less
The CPP contribution rates from the years 2020 to 2023 are outlined below.
The employee contribution amount is calculated based on the pensionable earnings less the $3,500 exemption.
The employer contribution is equal to the employee contribution.
A self-employed person pays the employee and employer amounts, which basically equals to two times of the employee amount.
How to apply for CPP benefits?
You should apply as soon as you develop a severe and prolonged disability that prevents you from regularly working. There are 2 ways to apply.
Do not wait for your doctor or nurse practitioner to complete the medical report or medical attestation forms before sending your completed application.
The processing time can be up to 120 days (4 months).
Visit CRA’s page on Canada Pension Plan disability benefit toolkit and Canada Pension Plan disability benefit application for more information.
This blog post is a summarized version of complex matters that are rapidly changing. The preceding information is provided for general, educational purposes only. Speak with one of our team members if you have any questions about your specific accounting or tax situation.
Clearly Financials offers Smart Accounting and corporate tax services to small businesses in Edmonton, AB. We provide a full suite of services including: Bookkeeping, Payroll, GST filing, Notice to Reader Financial Statements, and Corporate Tax Returns.
We enjoy helping small business owners get set up and hit the ground running. We offer Business Foundation Services which include business plan creation and business structure selection (e.g. to incorporate a business, or operate as a sole-proprietor).
Our Business Performance Management services help small business owners grow their companies, and their profits through goal-setting, budgeting and forecasting.
Our office is located in Old Strathcona in Edmonton, Alberta.
Book an appointment today through our convenient online scheduler.