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Top 7 Year-End Tax Planning Strategies For Your Business

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The year’s conclusion cannot come soon enough for a lot of individuals throughout the world. The past several months have been unparalleled, and their ramifications will be felt for many years to come. And although some small company owners, like those running restaurants and brick-and-mortar shops, have had it very tough, others, like Microsoft, Google, and Facebook, have seen their companies grow. Many companies were able to change their business structures in order to offer products and services that interestingly and imaginatively appeal to the “new normal.” While others expanded the number of online courses they offered, some began selling masks. Restaurants in trouble began enhancing their delivery options and menus. This year has been relatively interesting to a dispassionate business observer and will give economists and analysts alike a wealth of data in the years to come.

It is time for business owners everywhere to start thinking about some end-of-year tax planning strategies to not only make sure they can maximize their tax deductions and reduce taxes payable but also simplify the tax filing process in the New Year. This is true regardless of the state of your company. It is a good time to use calendar year deadlines for personal tax preparation, even if you are incorporated and your year-end date is not December 31st.

Have you contributed the most to your TFSA this year?

There is an annual contribution threshold for TFSAs. This implies that you may only make a limited amount of TFSA contributions each year. Additionally, if you go above your limit, the extra money is taxed each month. Therefore, before you start making investments in a TFSA, it’s crucial to have a clear understanding of your contribution limit.

If you are a first-time contributor and you have been over 18 and a resident of Canada since the TFSAs launched in 2009, you may contribute up to $75,500. Ask your adviser if it might be advantageous to transfer some of your investments from an open, non-registered (tax-exposed) account to a TFSA if you have TFSA capacity available. Your adviser can assist you in weighing the drawbacks of triggering a prospective capital gain against tax-free treatment for any future income.

It’s crucial to consider the increased flexibility in a TFSA vs the tax deductibility of an RRSP contribution when picking between an RRSP and a TFSA. Additional things to think about include timing, age, and marginal tax rates; TFSA withdrawals are tax-free, whereas RRSP/RRIF withdrawals are completely taxed. Remember to think about doing so before the end of 2021 if you do want to withdraw money from your TFSA in the near future. The withdrawal amount will expand the TFSA contribution room in 2022. Withdrawals enhance the amount of future contribution room depending on the value of the withdrawal.

Selling tax losses

A common “silver lining” year-end method used to gain tax benefits associated with a failing investment is tax-loss selling. A disposition made before the end of the calendar year will result in a capital loss if your adviser or tax expert informs you that you have securities in a non-registered account at the end of the year that are valued at less than the adjusted cost base. Depending on the fund, of course, the transaction must be posted three business days before December 31 in order to take place in 2022. If no capital gains have been made during the year or any of the three preceding taxation years, the capital loss can then be used to offset taxes due on those gains.

In addition to transaction costs, take into account the opportunity cost of not investing while adopting this technique. Finally, take into account the time to settle as well as the overall investment benefits of your sale.

Deferring the realization of a capital gain

Individuals are permitted to postpone capital gains on certain company assets that are sold in 2022. This deferral applies to dispositions if you buy another small company venture with the proceeds. The capital gain deferred from the previous investment is subtracted from the adjusted cost base (ACB) of the subsequent investment.

Due to events like a death or the dissolution of a marriage or common-law partnership, you may inherit shares from a spouse, common-law partner, or parent. The CRA considers you to have bought such shares at the same time and under the same conditions that the connected individual did when they were initially acquired for the purposes of the capital gains deferment.

Registered Education Savings Plans (RESPs) contribution 

For Registered Education Savings Plans (RESPs), the maximum cumulative contribution is $50,000. However, only the first $2,500 in yearly contributions will qualify for the full $500 Canada Education Savings Grant (CESG). Your child can still receive the whole award for 2022 if you pay the full $2,500 lump sum commitment before the year ends. All contributions and grants are tax-deferred and grow inside the registered account. The vehicle gives the kid access to all donated funds (including grants) as well as future growth on a tax-advantaged basis, provided that they meet certain criteria connected to their education.

The carry-forward CESGs enable a maximum of $1,000 in grants to be awarded in any one year if you are late in opening an RESP for a kid. This is particularly crucial if awards are to be maximized as the youngster gets older. No CESG may be claimed in the future if your kid or grandchild reaches 15 in 2022 and has never been the recipient of an RESP for which at least $100 in yearly contributions have been made for any four preceding years (and not withdrawn). In addition to provincially based ancillary programs, lower-income families are also eligible for supplementary benefits.

Think about when to do investments

Keep track of the mutual fund payout date for any non-registered investments you may be considering, in particular. Taxes are payable on earnings in non-registered accounts. Taxable distributions will take place for mutual fund trusts and exchange-traded funds (ETFs) on distribution dates, which frequently occur toward the end of the calendar year. For investors, each payout comprises the cumulative underlying realized income up to that point on a pro-rata basis. Therefore, if you invest in a fund at a certain point in time, you are buying into the fund’s cumulative profits.

Conclusion 

In this blog we have covered the year-end tax planning strategies for businesses. It is time for business owners to start thinking about some end-of-year tax planning strategies. It is a good time to use calendar year deadlines for personal tax preparation. If you are incorporated and your year-end date is not December 31st, consider transferring some of your investments to a TFSA. TFSA withdrawals are tax-free, but RRSP/RRIF withdrawals are completely taxed. Withdrawals enhance the amount of future contribution room depending on the value of the withdrawal.

Tax-loss selling is a common year-end method to gain tax benefits associated with failing investments. For Registered Education Savings Plans (RESPs), the maximum cumulative contribution is $50,000. However, only the first $2,500 in yearly contributions will qualify for the full $500 Canada Education Savings Grant (CESG). Your child can still receive the whole award for 2022 if you are late in opening an RESP. It looks like you have ample knowledge of tax planning strategies, so when are you going to start complying with them? 

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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