Year-end tax planning tips for business owners
When most of us think of year-end tax planning, we typically consider our personal situation. Yet, there are many tax opportunities for business owners to explore as we near the end of another calendar year.
The following tips assume your business is unincorporated or your corporation has a December 31st year-end, although some tips may also apply to corporations with an off-calendar year-end.
- Review your salary/dividend mix: If your business is incorporated, you’ll want to determine the optimal mix of salary and/or dividends to pay yourself. The corporation may be able to pay you different types of dividends, with some having more preferential tax treatment while other dividends may actually be eligible to be paid to you tax free. In other cases, paying a salary may prove to be more beneficial. Many factors affect the salary/dividend decision, both tax and non-tax, which makes it unique to you. This decision needs to be made prior to the end of the year and should be made in consultation with your tax professional. When you review your salary/dividend mix for 2024, you should also plan for the optimal mix for 2025.
- Consider accruing a bonus this year but paying it next year: A bonus accrued in 2024 but paid within 180 days after the business year-end is deductible to the corporation in the current year, but only included in your personal taxable income in the year you receive it. Assuming a December 31st year-end, the business would get a deduction for the bonus accrued in 2024. However, you won’t have to include the amount in your income until you file your personal tax return for 2025 early in 2026, resulting in a significant tax deferral.
- Look at salaries to family members: If your spouse or common-law partner and/or child is involved in your business (incorporated or not), consider paying them a reasonable salary for the services they provide. This can shift income into the hands of family members who may pay tax at lower rates, resulting in less tax paid at the family level than if this remuneration were paid to you. If those same family members are shareholders of your corporation, proceed with caution if considering paying them dividends. Restrictive tax rules impose high tax rates on dividends paid to family member that do not meet certain conditions.