Year-End Tax Planning: 8 Strategies for SMBs
Discover 8 tax planning strategies to implement before your fiscal year-end to reduce your tax bill.
The end of the fiscal year is the ideal time to review your tax situation and implement strategies that will legitimately reduce your tax bill. Here are 8 proven strategies Canadian SMBs should consider before closing their fiscal year.
1. Accelerate Expenses or Defer Revenue
If your business uses accrual accounting, you can reduce taxable income by accelerating certain deductible expenses before year-end. This includes purchasing supplies, prepaying rent or insurance, and undertaking repair and maintenance expenditures. Conversely, if possible, defer invoicing certain revenues past the closing date to push them into the next fiscal year.
2. Maximize Capital Cost Allowance (CCA) Deductions
Capital cost allowance (CCA) lets you deduct the cost of capital assets over several years. By acquiring eligible assets before year-end, you can claim CCA in the current year. Since 2018, the Accelerated Investment Incentive allows an enhanced first-year deduction for most asset classes. Check the applicable CCA classes (Class 10 for vehicles, Class 50 for computer equipment, Class 8 for furniture) and plan your acquisitions accordingly.
3. Pay Bonuses to Employees and Shareholders
Bonuses paid to employees and shareholder-managers are deductible for the corporation in the year they are declared, provided they are paid within 180 days of year-end (section 78(4) of the Income Tax Act). This strategy reduces the corporation’s taxable income while transferring income to an individual, potentially at a lower tax rate.
4. Review Shareholder Loans (Section 15)
Section 15(2) of the Income Tax Act provides that loans made by a corporation to its shareholders must be repaid within one full fiscal year following the year of the loan; otherwise, the amount is included in the shareholder’s income. Before year-end, review all shareholder account balances and ensure loans are repaid within the prescribed deadlines to avoid this income inclusion.
5. Contribute to Retirement Plans
Employer contributions to a group Registered Retirement Savings Plan (RRSP) or a Registered Pension Plan are deductible for the corporation. Making these contributions before year-end reduces taxable income while providing a valued benefit to employees. For owners who pay themselves a salary, maximizing personal RRSP contributions also reduces tax payable at the individual level.
6. Write Off Bad Debts
If you have accounts receivable you deem uncollectable, year-end is the appropriate time to write them off. Writing off bad debts creates a tax deduction and more accurately reflects the true value of your assets. Document your collection efforts and the reason for the write-off to justify the deduction in case of a CRA audit.
7. Review Inter-Company Transactions
If you operate multiple corporations, ensure that inter-company transactions are conducted at fair market value and properly documented. The CRA closely scrutinizes transfer pricing between related corporations. Use year-end to review inter-company balances, invoice appropriate management fees, and ensure each corporation has income and expense levels consistent with its activities.
8. Plan the Timing of Dividend Payments
The timing of when dividends are declared and paid can significantly impact the overall tax burden. In Quebec, the highest marginal tax rate on ordinary dividends can exceed 48%. By planning dividend timing — for example, spreading them across two calendar years — you can potentially reduce the shareholder’s personal tax by avoiding concentrating too much income in a single year. The capital dividend account (CDA) balance should also be reviewed to maximize tax-free dividend payments.
Start Early with Your CPA
The most effective tax planning begins well before year-end — ideally three to six months in advance. A CPA can analyze your specific situation, model different scenarios, and recommend the most advantageous strategies. At Stamped, we work with our clients throughout the year to optimize their tax position and prepare for a year-end with no surprises.