Business Taxation Management Mark Kolta
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Overview Introduction Computation of taxable income T2 (corporate income tax return) – the basics Calculating the year-end tax provision New tax depreciation (CCA) rules Tax treatment for automobiles Small business deduction for corporations Benefits of incorporating Basic tax planning for bookkeepers Q&A 2
Computation of taxable income Starting point – income per financial statements
(GAAP) Add-back: Non-deductible items: ◦ ◦ ◦ ◦ ◦
Income tax expense for accounting Interest and penalties on taxes Accounting depreciation Meals and entertainment – 50% Golf fees
Subtract – Deductible items ◦ Tax depreciation (CCA) ◦ Accounting gains ◦ Dividends from Canadian corporations 3
Tax Deductions “Any reasonable expense incurred for the
purpose of earning income from business”
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Computation of taxable income continued Example: Net income per F/S $100,000 Income tax expense per F/S $12,000 Interest and penalties on taxes $1,000 Accounting depreciation Meals and entertainment
$10,000 $5,000 Golf fees $3,000 CCA $13,500 Accounting gain on share sale $4,000 Dividends from Canadian Corp $20,000 5
Computation of taxable income continued Net income per FS
$100,000
Add: non-deductible items ◦ ◦ ◦ ◦ ◦
Income tax expense Interest/penalties on taxes Accounting depreciation Meals/entertainment – 50% Golf fees
$12,000 $1,000 $10,000 $2,500 $3,000 $28,500
Subtract: deductible items ◦ CCA ◦ Accounting gain on share sale ◦ Dividends from Canadian Corp.
($13,500) ($4,000) ($20,000) ($37,500)
Income for tax purposes
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$91,000
Calculating the tax provision Combined tax rate (Ontario and Federal) – 16.5%
for small business Three steps to record year-end tax provision 1. Record tax expense for the year (income
statement) $91,000 x 16.5% = $15,015
2. Verify tax installments, refunds, are recorded in
tax payable account (balance sheet) 3. Compare last year’s tax estimate to actual and book the difference
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Tax depreciation rates Automobiles – 30% Computers – 55% Furniture and fixtures – 20% Manufacturing equipment – 50% Other equipment – 20%
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Automobiles Lease versus buy Lease – deduct amount of lease payment – fixed Buy – deduct tax depreciation – declines over time
Personally vs. corporately owned / leased Vehicle allowances Taxable vs. exempt
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Automobiles - continued Standby charge 2% x 12 months x cost of car Or 2/3 of monthly lease cost Reduction for > 50% business use
Operating cost benefit 24 cents per KM of personal use OR 50% of standby charge if > 50% business use
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Small business deduction First $400,000 of active business income is taxed
at low tax rate – 16.5% Available to corporations What’s active business income? $400,000 exemption shared among associated corps. Bonus down if over $400,000 Strategies to multiply $400,000 exemption
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Benefits of Incorporating Limited liability Lower tax rate – 16.5% Tax deferral More tax deductions Capital gains exemption Ownership flexibility
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Home Office To deduct home office expenses, must meet one of two
tests: Principal place of business OR 2. You regularly meet clients 1.
Types of expenses: ◦ ◦ ◦ ◦ ◦
Utilities Repairs & Maintenance Mortgage Interest Property Taxes Insurance
Deductible in proportion to size of office If you’re incorporated, consider charging rent to your corp. 1 3
Compensation Management fees GST
Dividends Salary Loan repayments
Income splitting Salary Reasonable
Dividends Ownership issues
Employee profit sharing plan Not subject to CPP / EI
Other tax tips Home loans Creditor proofing (holding companies) Buying real estate – inter-company loans R&D tax credits
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