DINO INFANTI, Partner, National Leader – Enterprise Tax KPMG in Canada
With over 15 years of experience, and KPMG’s Partner, National Leader KPMG Enterprise ™ Tax, Dino Infanti is well known for his insights and guidance on tax technical work in estate and succession planning, corporate restructuring, tax mitigation strategies and divestitures. Dino specializes in owner-managed enterprises primarily in the construction, real estate development, and holdings sectors, in addition to the entertainment sector.
What is the most important aspect that business owners should consider when planning their year-end taxes?
A business owner-manager should pay attention to year-end remuneration strategies which include determining the most tax-effective salary-dividend mix that minimizes overall taxes for both the corporation and the shareholder. This is a complex decision that must consider personal marginal tax rates, corporate tax rates, available RRSP contribution room, payroll taxes, various personal deductions and credits that may be applicable, and the potential impact of alternative minimum tax.
As well, the federal government recently implemented measures that affect private corporations (referred to as the Tax on Split Income Rules or TOSI) that make year-end tax planning more complex and challenging. The relatively new rules limit so-called income sprinkling among family members through the use of a private corporation, in addition to reducing the tax advantages of accumulating passive investment portfolios within a private corporation. Other important considerations for year-end planning may include properly timing the purchase and sale of fixed assets and repaying shareholder loans.
Why is it important for entrepreneurs to plan their taxes ahead of time? How does it benefit them?
It’s about being proactive. Income taxes are often a significant cost to a business owner’s affairs, therefore, planning to mitigate these costs is prudent. Tax planning may result in immediate benefits, but often the benefits are long-term. The continuous change in personal and corporate tax rates, changing family circumstances and new business transactions necessitate the review of regular tax planning. Tax planning should be considered a year-round exercise and should be undertaken before every significant business transaction, since it may be too late to plan after the fact – when a deal has already closed.
What is the biggest mistake that entrepreneurs make when it comes to planning their taxes and what are some of the steps they can take to prevent these mistakes?
An often-overlooked tax planning opportunity for a private business owner is estate planning. The owner-manager who has built value in their business may wish to consider implementing an estate freeze to minimize taxes on death, as well as probate fees. An estate freeze is a tax planning technique that “freezes” the current value of the business in favor of the current owner-manager, with the future growth in value succeeding to the next generation of family members, generally via a discretionary family trust. Finally, it’s good practice for the business owner to have a will that is current to ensure it reflects changes in family status, business conditions and changes in the law.
One of the most generous tax concessions of the Canadian tax system for small business owners is the lifetime capital gains exemption (LCGE) of $866,912 (2019, to be indexed for 2020).
This exemption may be realized on the sale of shares of their corporation that is an active business carried on in Canada. Depending on the province of residence and assuming the highest marginal tax rate, this can equate to an income tax savings of approximately $216,000 for each LCGE available. Where qualified small business corporation shares may be disposed of in the future, it is important to plan well in advance to consider this opportunity, and in some cases structuring the shareholdings of the corporation to multiply the number of LCGE’s available amongst the family members. To claim this exemption, there are a number of conditions that need to be met, two of which are point-in-time tests regarding the fair market value of the assets in the corporation (i.e. at the time of disposition) as well as a 24-month lookback. For example, accumulating excessive passive investments in the company could mean that substantially all of the assets of the company are not be used in an active business which, in turn, can jeopardize the ability to claim the LCGE. Business owners should be aware of this in particular where they may sell the shares of their corporation in the future.
How is the new passive investment income regime affecting business owner’s taxes?
For taxation years that begin after 2018, new tax measures reduce the tax advantages of accumulating passive investments within a private corporation.
The annual small business deduction (SBD) of a Canadian-controlled private corporation (CCPC) and associated CCPCs that earned more than $50,000 of passive investment income in the previous year is reduced by $5 for every $1 of that investment income over $50,000 (the SBD is fully eliminated at $150,000 of investment income).
Further, a CCPC is entitled to a refund of taxes that are paid on investment income only by paying taxable dividends from income that has not been taxed at the general business tax rate (referred to as “non-eligible dividends”). Measures may be taken to mitigate the effect of the new rules depending on the company’s circumstances. These measures may include revisiting your investment strategy (consider non-income generating investments such as marketable securities that don’t pay dividends and permanent life insurance policies), individual pension plans, distributing the corporate surplus to the shareholders, paying down debt or purchasing new equipment instead of acquiring investment assets.
These new rules may impact shareholders who are close to retirement and were previously using their corporation as a retirement vehicle, as the elimination of the SBD for corporations earning investment income along with active business income. This may have an impact on the amount of after-tax cash available to them once they retire.
What advice can you give to business owners who have maximized their small business deduction?
The combined federal/provincial small business tax rate in British Columbia decreased from 12% to 11% on January 1, 2019, making it even more important that companies maximize the small business deduction. There is a significant tax deferral where a corporation earns income subject to the SBD in comparison to an individual in the top marginal tax bracket. In BC the tax deferral is 38.8% (Ontario is 41.03%). However, there still is a tax deferral available in comparing a corporation and an individual at the top marginal tax bracket at the general tax rate. In BC the tax deferral is 22.8% (Ontario is 27.03%). It is clear that being eligible for the SBD provides for the greatest tax deferral.
As mentioned earlier, new tax rules provide that for taxation years beginning after 2018, limit CCPCs from investing their surplus capital into passive investments, thus encouraging them to reinvest their surplus into active business income sources.
If a company is in danger of having its small business limit ground down by investment income, it should consider using the above-mentioned techniques to reduce or eliminate excess investment income in order to maximize the tax deferral within a CCPC.
What strategies or initiatives should entrepreneurs put in place to reduce their tax payments at the end of the year?
Tax planning should consider both personal taxes and corporate taxes. To help entrepreneurs assess their 2019 tax situation, KPMG has prepared a checklist with tips that will help evaluate compensation plans (an effective dividend/salary mix), family tax considerations, business tax considerations, and estate plans, among other items. These year-end tax-saving tips are summarized in KPMG TaxNewsFlash-Canada “2019 Year-End Tax Tips for OwnerManagers”, available from the KPMG website. Since every business owner’s individual circumstances differ, we recommend that entrepreneurs meet with their KPMG Enterprise Tax Advisor so that they can determine how the changing tax rules might affect them, their family and their private companies.
Are there any programs or resources available that can help entrepreneurs when it comes to planning their year-end taxes?
KPMG Enterprise has a series of webinars on selected tax topics oriented towards private business owners, referred to Enterprise Tax on Demand (EToD). These webinars offer succinct and insightful information to help make your business better.
Recent webinar topics include Tax on Split Income, Lifetime Capital Gains Exemption, Top 5 Things You Should Consider in Preparation for the Sale of a Business, Employee Stock Options, Shareholder Agreements, Employee versus Contractor, and Expanding your Business into the U.S. There is more in the series to come. You can find the EToD webinars on the KPMG Enterprise website.
On an annual basis, KPMG publishes a book entitled “Tax planning for you and your family – your guide to saving money at tax time and all year round”, which provides up-to-date information on recent tax rules that may significantly affect private company owners and their families, including the taxation of split income and the new passive investment income rules. It also offers new information on changes to the Home Buyers’ Plan, proposed changes to the rules for employee stock options, and guidance on recent changes affecting Canadians with U.S. income and property. The book is available in bookstores or can be purchased online. Entrepreneurs can also download KPMG’s publication Tax Facts from the KPMG website, and get quick access to the most relevant and up-to-date tax figures and evolving tax trends.
On a final note, how do you predict the future of tax planning for small and medium-sized business owners?
A minority federal government requires us to look at each party’s election platform tax promises as an indication of potential future tax measures. Refer to KPMG TaxNewsFlash-Canada “2019 Federal Election – Parties Offer Up Diverse Tax Policies”, available from the KPMG website, which provides a good summary of the tax pledges made by each party.
The basic principles of tax planning (strategies to reduce and defer tax) will remain the same. What business owners can do is maintain and retain good records, generally stay informed about tax changes, and assemble a team of good professional advisors to proactively address required changes in their overall tax strategy. They should also have a clear succession plan which involves a strategy to ensure that the benefit of the business assets passes to the right people at the right time, and with minimal tax.
For KPMG’s Tax Newsflash, please visit: https://home.kpmg/ca/en/home/insights/2010/04/tax-news-flashcanada.html