With the curve flattening in BC, I am going to practice optimism and leap back to the future to discuss tax planning for BC individuals and small businesses for the 2020 year end.
Operating loss utilization
- There will be businesses with operating losses for this fiscal year. Losses can be carried back three years whether you are proprietor or an incorporated business. Note that many of the financial assistance received under the Canada Emergency Response Plan for businesses (except for CEBA) is considered financial assistance and will be included in income.
Capital loss utilization
- Similar to non-capital loss (operating loss), capital loss can be carried back three years for all taxpayers. Since it is 2020, three year back would be 2017, the year when capital gains were plentiful in real estate and equity.
Using the personal tax brackets efficiently
- Despite the expected decrease
in taxable income at the corporate level, consider using the personal tax
- Buy RRSP for 2020 so that the investment income and capital gains can be sheltered. However, consider deducting the contribution in the future when income is higher than 2020.
- Your CCPC taxable income could be down but your remuneration whether dividends or payroll, should take advantage of the personal low tax brackets.
- Payroll to non-arms length parties for services rendered can and should continue. As noted above, operating losses can be carried back three years if necessary.
- Consider deferring depreciation claim as this is allowed by the ITA.
Extraction of the CDA balance
- Consider extracting the CDA balance prior to the pandemic lockdown as this balance will be reduced by any subsequent capital losses. The required capital dividend election form would likely be filed late, but the late filing penalty for this form is nominal.
Consider triggering capital gains before year end as part of long-term planning
- Ottawa has been raising taxes for the past few years. For these past years, there has been loud whispers that the capital gain inclusion rate would increase from the current 50 percent. Billions have been offered as assistance to individuals and businesses during the lockdown. Our income tax rates will likely keep going up in the foreseeable future to fund the deficits.
- CCPC also have an annual 50K limit on their investment income (which includes the 50% taxable capital gains) before the SBD limit starts reducing.
- Triggering capital gains sooner rather than later to address with the 50K investment income limit or to absorb current year capital losses should be considered before fiscal year end.
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Above are the more common tax planning considerations once we are back to normal.
Meanwhile, stay safe.