Paying Your Corporate Income Tax by Instalments

As we approach the end of the year, it is time to consider options which may be available to you to reduce your year-end tax bill as well as planning that can be done for the future. A comprehensive tax plan requires balancing yo

Most corporations are required to make instalment payments throughout the year as tax is usually not deducted at source on corporate earnings. It is important to understand these rules to ensure you pay a minimum amount of estimated taxes throughout the year without triggering interest or penalties on deficient instalment payments.

New corporations are not required to make instalment payments during their first year of operation. Corporations are also not required to make instalment payments if their income taxes payable in the current or previous year is $3,000 or less. In most other situations, you will be required to make monthly or quarterly instalment payments throughout each tax year.

Instalments are required for income that is subject to tax under Part I of the Income Tax Act . Most corporate earnings are subject to tax under Part I. Taxes assessed under Part VI (tax on capital of financial institutions), Part VI.1 (tax on corporations paying dividends on taxable preferred shares) and XIII.1 (additional tax on authorized foreign banks) are also included in the instalment requirements. Please note that taxes assessed under Part IV of the Act are not included. Corporations that receive dividend income and pay refundable taxes under Part IV are not required to pay instalments on these taxes even though the taxes payable exceeds $3,000.

Once it is determined that you are required to pay tax by instalments, you must make either monthly or quarterly payments. You can choose from three options to calculate these payments: current year estimated tax payable, previous year tax payable and a combination of the previous year and second previous year tax payable. Instalments are required based on the lowest amount calculated under these three options:

(1) Payments of 1/12 of your current year estimated tax payable are required each month of the tax year. If you are eligible for quarterly payments, payments of 1/4 of your current year estimated tax payable are required each quarter of the tax year.

(2) Payments of 1/12 of your prior year tax payable are required each month of the tax year. If you are eligible for quarterly payments, payments of 1/4 of your prior year tax payable are required each quarter of the tax year.

(3) Payments of 1/12 of the tax payable from the year before the previous tax year are due in each of the first two months of the current tax year; then payments of 1/10 of the difference between the tax for the previous tax year and the total of the first 2 payments are due in each of the remaining 10 months of the tax year. If you are eligible for quarterly payments, a payment of 1/4 of the tax payable from the year before the previous tax year is due the first quarter of the current tax year. Quarterly payments of 1/3 of the difference between the tax for the previous tax year and the first payment is due in each of the remaining three quarters of the current tax year.

A small Canadian-controlled private corporation (CCPC) is eligible to make quarterly instalment payments if, at the time the payment is due:

• it has a perfect compliance history
• it has claimed a small business deduction for the current or previous tax year
• together with any associated corporations, for the current or previous tax year:
• it has taxable income of $500,000 or less
• it has taxable capital employed in Canada for the tax year of $10 million or less

When a corporation ceases at any time in a tax year to be eligible to pay quarterly instalments, the corporation is still allowed to pay its next instalment due at the end of the current quarter; however, the corporation will have to begin to pay monthly instalments following that quarter.

Corporations that have a permanent establishment in Quebec or Alberta may need to make instalment payments to the provincial authorities. Instalments are required in Quebec and Alberta if taxes payable in the current or prior year exceeds $3,000 and $2,000, respectively. The requirements and calculation options mostly parallel the federal rules discussed above.

Interest will be charged at the prescribed interest rate on all unpaid, insufficient or late instalment payments. Interest will be calculated based on the option which results in the lowest amount. You will also be assessed a penalty if total interest charges exceed $1,000. If instalments are overpaid throughout the year, the amount can be refunded to you when your income tax return is assessed, or it can be transferred to the instalment account of the next tax year.

We would be happy to assist you in calculating your required instalment payments under the different options and advising on which option is best for you. Please call us if you would like to discuss this matter.

ur current and future objectives based on an assessment of your current financial position, current tax laws, and potential future changes. This is a complex and dynamic assessment that should be reviewed on an annual basis. Below are a few planning considerations that may be applicable to you.

Salary and Dividend Mix

Incorporated business owners must determine the optimal mix between salary and dividends to remunerate themselves and potentially their family members. There are a few key points to consider when making this determination. Pension Plan (CPP) purposes. Individuals must report earned income of at least $171,000 on their 2022 income tax return to receive the maximum 2023 RRSP contribution room of $30,780. Similarly, individuals must report earned income of at least $64,900 in 2022 to contribute the annual maximum of $3,499.80 to CPP. You should consider additional salary payments if contributing to either RRSP or CPP is important to you.

• Paying salary or dividends to family members who are in a lower tax bracket can be a highly beneficial income splitting strategy. Salaries must be reasonable based on the work performed by the family member in respect of the business. Salaries can be paid by both incorporated and unincorporated businesses. Dividends may be subject to “tax on split income (TOSI)” which causes the dividends to be subject to tax at the highest marginal rate, effectively eliminating the benefit of this income splitting strategy. Generally, TOSI will not apply if the family member is active in the business, or if the dividends received represent a reasonable rate of return based on other factors such as capital provided, or risks assumed. As this is a very complex area, please contact us so we can analyze in detail and ensure TOSI will not apply.

Year-end Bonuses

Beyond the salary and dividend considerations discussed above, there are rules with respect to year-end bonuses that must be considered by corporate business owners.

• Bonuses accrued by a corporation at year-end must be paid within 180 days to be deductible in the year. Amounts not paid within this timeframe will only be deductible in the year paid.
• Canada Revenue Agency has an administrative policy to accept the deduction of bonus accruals when the net payment is not made if the payroll deductions on the bonus are remitted to the Receiver General by the due date. This policy can alleviate cash flow concerns and provides an additional option to clear shareholder debit balances as discussed below.

Shareholder Loans

Shareholder loans can only have a debit balance at the end of one fiscal year. If you had a debit balance at the end of the previous fiscal year, it is imperative that we clear this balance by the end of the current fiscal year to prevent adverse tax consequences. A few options to clear these balances are:

• As mentioned above, a bonus can be declared to you. Rather than writing yourself a cheque for the net pay, the net amount of the bonus can remain in the corporation and applied against this.
• Salary is a tax-deductible expense while dividends are paid from after-tax earnings. Therefore, salary payments may be preferred if you wish to reduce the taxable income in the corporation. For example, Canadian-controlled private corporations (CCPCs) may be eligible for the small business deduction (SBD) on taxable income up to $500,000. The SBD reduces the federal rate on active business income from 15% to 9% as of 2022. Depending on your province or territory of residence, the combined small business rate can be as low as 9% and the combined general rate can be as high as 31%.
• Salary qualifies as earned income for Registered Retirement Savings Plan (RRSP) and Canada balance. Payroll deductions must be remitted on time. If the bonus is accrued, the net pay will not offset the shareholder balance until the subsequent year.
• Dividends can be declared to offset the debit balance. Depending on the tax balances available in the corporation, this dividend may be an eligible dividend, non-eligible dividend, or a tax-free capital dividend. We can determine an optimal plan based on the options available to you.
• The balance can also be repaid by you with personal funds. This must be done prior to the end of the fiscal year.

Passive Income

Passive income, such as dividends, interest, capital gains, rental income, and royalties, are generally taxable at higher corporate tax rates than active business income. The combined tax rate on investment income varies depending on the corporation’s provincial residence but is around 50% in each province or territory. Various planning points should be considered in respect of passive income.

• A portion of the tax paid on investment income will be refundable to the corporation upon payment of dividends to the shareholders. Depending on your personal marginal tax rate and cash flow needs, we should consider declaring dividends to you to recover a portion of this refundable tax.
• The SBD available on active business income is subject to a grind based on the adjusted aggregate investment income (AAII) of the corporation and any associated corporations. The SBD is reduced by $5 for every $1 of AAII above $50,000. Once AAII reaches $150,000, the SBD will be eliminated completely. Planning can be done to preserve the SBD, such as by accelerating or deferring capital gains or losses or adjusting your investment mix.
• Individuals may have access to the lifetime capital gains exemption (LCGE) on the disposition of qualified small business corporation (QSBC) shares. The LCGE allows an individual to realize a tax-free capital gain up to $913,630 as of 2022. One of the rules for this exemption to apply is that the corporation’s assets must be primarily used in an active business in Canada. Excess cash or investment assets could jeopardize your ability to benefit from this exemption. Please contact us so we can review your options to ensure eligibility on a future sale.

Depreciable Assets

Timing the purchase of significant expenditures can accelerate the deductions on your income tax return.

• Depreciable assets are subject to annual capital cost allowance claims on your tax return. Accelerating the purchase of certain assets so they are available for use before year-end may allow for additional income tax deductions.
• Measures have been implemented that may allow for enhanced capital cost allowance claims on certain assets. These measures are implemented to incentivize business investment. Please contact us so we can discuss the measures currently available and how they can benefit your business.

Incorporation

Year-end is a great time to assess your business and determine if incorporation may be beneficial for you.

• Corporations allow for a tax deferral as corporate tax rates are generally lower than personal tax rates. The tax deferral can exceed 40% for active business income eligible for the SBD compared to the highest combined marginal tax rate for individuals in your province or territory of residence. However, you must leave funds in the corporation to benefit from this tax deferral as any amounts withdrawn as either salary or dividends will be subject to personal tax.

Charitable Donations

Charitable donations can be claimed as a deduction on your tax return, and unused contributions can be carried forward for up to five years. The donation deduction is limited to 75% of the net income reported on the tax return.

• Donations to registered charities, registered Canadian amateur athletic associations, registered national arts service organizations, certain registered public bodies, the United Nations and its agencies, universities outside Canada, and others may qualify for the donation deduction. An official receipt should be received to support the claim on your income tax return.
• Donations to United States charities may also qualify for the donation deduction if the charity is generally exempt from United States tax and it could qualify as a registered charity if it were resident in Canada. These donations can only be claimed against income sourced from the United States up to 75% of this income.
• Donations of marketable securities can be particularly beneficial. The fair market value of the marketable security will be eligible to claim as a deduction. Furthermore, any accrued capital gain on the donated securities will not be subject to tax on your tax return. The full value of the capital gain will be added to corporation’s capital dividend account which can be paid out to shareholders on a tax-free basis.

GST/HST and PST Considerations

Sales taxes can often be overlooked as part of your tax obligations. You must ensure that you are aware of your obligations, have retained proper documentation, and filed any elections which may be beneficial to you.

• You are generally required to register for, collect and remit GST/HST if your taxable supplies exceed $30,000 over a period of four calendar quarters. Your effective date of registration depends on various factors. We can assist you in determining this date and completing the registration process.
• Non-harmonized provinces, such as British Columbia, Manitoba, Quebec, and Saskatchewan, administer their own PST programs. Each has separate regulations and registration requirements. We should assess your obligations if you are selling to these provinces.
• The GST/HST Quick Method is available to certain small businesses which simplifies your reporting requirements and may result in lower remittances if you do not have large Input Tax Credits (ITC) to claim on your return. This election must be filed by the first day of the second fiscal quarter if you are an annual filer, or by the due date of the return if you are a monthly or quarterly filer.
• A closely related election is available to related groups of corporations or partnerships. This election allows certain taxable supplies made within the group to be treated as having been made for nil consideration. This can be beneficial from a cash flow perspective as it eliminates the need for one member of the group to collect and remit the GST/HST while another member of the group claims the amount as an ITC.

Balances Owing

We always recommend getting an early start on assembling your tax information so we can ensure that all balances are paid in a timely manner to avoid the assessment of interest and penalties.

• Balances owing for corporation income tax returns are generally due two months after the fiscal year-end. Certain CCPCs have until three months after year-end. The tax return must be submitted within six months of year-end.
• Self-employed individuals must pay any balance owing by April 30 of the subsequent year. The personal income tax return must be submitted by June 15 of the subsequent year.

These are just a few suggestions that may be applicable to you and your business. There are many additional planning points to consider that we would be happy to discuss in detail. Please contact us so we can work together to create a comprehensive plan tailored to your needs.