Does the thought of finalizing your year-end fill you with dread? If sifting through piles of paperwork, updating spreadsheets, and tracking expenses make your blood run cold, we have some tips to help keep you on track and make your year-end run smoothly, regardless of when it is.
Technically, for the smoothest transition to the new year, you should start planning and tracking well before the end of the year. Failing that, ensuring that your paperwork and accounting are organized is a natural starting point for an efficient and stress-free year-end.
While most large and mid-sized businesses have a dedicated accounting department, many small businesses, solopreneurs, and start-ups who outsource accounting functions may leave all of their bookkeeping and expense tracking until year-end, which may result in missed deductions, miscalculated installment payments, and unnecessary stress. Reviewing the state of your filing and implementing a paperless bookkeeping system is a worthwhile goal that could save your business a great deal of time, filing space, and hassle in the long run.
If you are thinking about making a significant purchase like new computers, ergonomic office furniture, or an important piece of equipment or technology, it may make sense to make these purchases before the year’s end as expenses incurred in a business’s fiscal year must be claimed against income earned in that year and you will be able to offset an amount of GST/HST payable. However, it is also worth noting that high-value items like chairs and computers are considered to be capital assets that cannot be fully expensed in one year, and must be deducted over their lifetime. This yearly deduction is known as a “capital cost allowance”. However, you can still get a first-year depreciation deduction, regardless of the point when you purchase it during the year.
Declaring year-end bonuses to employees can be a wise strategy to reduce overall profit and consequently, the taxes payable. The CRA allows you to declare bonuses in the current fiscal year and pay them in the following year as long as it is within six months of the date of declaration. The advantage of declaring bonuses in the current fiscal year, but only paying them in the following year is that the business gets the benefit of the tax deduction right away while the employee only needs to declare them as taxable income in the following year.
For those who are incorporated, it may make financial sense to retain extra funds and invest directly through your corporation. The benefit of this is that it allows you to defer taxes on any amounts that would normally be withdrawn as a salary or dividends. While you will still have to pay corporate taxes, you would save the personal tax owing which can be as high as 50% in some provinces. By retaining excess funds in the corporation, you are open to a variety of investment strategies that will allow you to earn interest, dividends, or capital gains.
Sale of Assets
If you plan to sell any major capital assets, consider delaying the sale until 2023 or the start of your business’s next fiscal year. This will allow your business to claim one additional year of Capital Cost Allowance (CCA) and can postpone including the capital gains on taxable income by one year. However, this planning applies to depreciating property, capital property, and investments and should be discussed with an accounting professional.
Strategies for CCPCs
Canadian-controlled private corporations (CCPCs), unincorporated businesses carried on directly by Canadian resident individuals (other than trusts), and certain eligible partnerships may immediately expense up to $1.5 million of eligible property in each year starting from 2021 for CCPCs and from 2022 for other eligible taxpayers.
The $1.5 million limit must be shared among members of an associated group of eligible persons or partnerships. Eligible property generally includes all depreciable capital property, other than longer-term investments such as buildings and certain structures, and unlimited life intangibles including goodwill.
The Scientific Research and Experimental Development (SR&ED) tax incentives program is a generous and broadly applicable research and development (R&D) tax credit. In fact, it is the largest single support program in Canada, providing over $4 billion in tax incentives through more than 20,000 claims annually.
CCPCs are eligible to receive a 35% refundable tax credit, and applicable foreign companies or non-CCPCs may be eligible to receive a 15% non-refundable tax credit to offset any corporate taxes owed when applying with qualifying person-hours and wasted material expenses.
SR&ED tax credits are available to many industries: printing, manufacturing, energy production, holistic preventative and recovery therapies, cannabis growers, new home and business construction, wineries, distilleries, breweries, and commercial food producers.
Many CCPCs do not think they could qualify or are not even aware the program exists, and are missing out on potentially thousands of dollars in tax credits and refunds every year. SR&ED tax credits should be a crucial part of your successful financial future and overall financial success strategy.
SRED Unlimited has extensive experience with different software accounting packages – including Taxprep, ProFile, Cantax, and TaxCycle; we will send back your updated T2 with SR&ED in the same format you used to prepare your original T2. Our turnkey-style application system minimizes the time your employees and accounting professionals is taken away from what they need to be doing. We let your staff focus on their own work, not the administrative and technical details of preparing SR&ED claims.
As the holiday season ramps up, you and your team will want to spend time with your friends and loved ones, not burning the midnight oil in the office to get year-end paperwork completed. Cheers to a stress-free year-end and a successful new year!