2023 year-end tax planning for you and your business

Start by reviewing how you pay yourself or other family members to find a tax-efficient way to take funds from your business.  

If possible, pay yourself a salary that’s large enough to maximize your CPP and RRSP contributions. Make sure any family members that work for the business are paid reasonably (i.e., a salary that you would pay a non-family member to do the same job). 

Determine what the most effective mix of dividends and salaries is for you and your business. Keep in mind that:  

• a business can deduct a reasonable salary payment, whereas dividends are paid from after-tax profits 
• dividends paid to a family member may be subject to the “tax on split income” (TOSI) rules and trigger tax at a higher marginal tax rate.

Bonuses accrued must be paid within 180 days following the year-end to qualify for a deduction.

You must charge yourself interest if you have borrowed funds from your company. If the interest rate you are charging is below the prescribed rate set by the CRA, the differential might be treated as additional income for tax purposes.    

You should repay any loans from your business within one year of the company’s tax year-end; if you don’t, you’ll need to report the full loan amount as income for the year it was received. For example, let’s say you borrow $10,000 from your company on June 1, 2023 and your business has a September 30 year-end. If the loan remains unpaid on September 30, 2024, you’ll have to report the $10,000 as income on your personal income tax return for the 2023 taxation year. Exceptions may be available for certain home, company stock, or car acquisitions where the loan is made because of your employment (and not as a shareholder). To meet these exceptions the loan must be subject to a bona fide repayment arrangement within a reasonable term. 

If a loan is forgiven, that amount will be included in your income in the year of forgiveness. Finally, as shareholder loans are assets for your business, it’s important to make sure these non-active business assets do not “taint” the Small Business Corporation or the Qualified Small Business Corporation status of your company. 

If you've realized capital gains in 2023 from non-registered investments and you have other investments with unrealized losses, consider selling the loss investments before the year end to trigger the capital losses. These losses can be used to offset the realized capital gains in the year, which reduces your taxes payable. This tax planning strategy is most effective if you have no further interest in owning the losing investments. It’s important to note that the superficial loss rules may deny the capital losses if you or an affiliated person acquire the property or an identical property within 30 days before or after the sale. 

Check whether your business can benefit from any government relief programs that are set to expire at this end of this year. For example:  

• Are you thinking about purchasing significant capital properties? You should consider doing this before the end of this year. The immediate expensing rules allows Canadian-controlled private corporations (CCPCs) to immediately write off up to $1.5 million of certain eligible capital property. This, only applies to property that’s available for use by December 31, 2023 (among other conditions). 
• Do you have an outstanding Canada Emergency Business Account (CEBA) loan balance? Don’t miss the repayment deadline of January 18, 2024 to qualify for partial loan forgiveness up to $20,000. 

If you plan to exit your business soon or in the future, take some time to understand how recently proposed tax measures could impact your succession plan. 

If you want to transfer your business to the next generation (i.e., children, grandchildren, nieces or nephews), consider whether you should do so before the end of this year. Changes to the intergenerational business transfer rules could affect your transaction. The proposed changes to these rules, which will affect transactions occurring on or after January 1, 2024 (if enacted), will require businesses to meet additional requirements and conditions. 

You may also want to consider selling capital properties and using your capital gains exemption this year before changes to the alternative minimum tax (AMT) come into effect. If the AMT rules are enacted, a large capital gain could result in more taxes owing starting in 2024. It’s important to note that, under the proposed rules, if you pay AMT for a specific year, the additional tax (i.e., the difference between the AMT paid and the regular tax) can be carried forward as a credit for up to seven years to offset future taxes owing. 

If your business succession plan involves selling the business to your employees, you could consider pressing pause until the new year. There’s a new succession planning opportunity on the horizon that may make the process easier. The proposed employee ownership trust rules provide for an easier transition to employees and provide many tax benefits. These rules are proposed to be effective January 1, 2024.  

If you’re a high-income individual that makes large donations of cash or public company shares, consider giving before the end of this year, as the proposed changes to the AMT rules may also affect you. The current AMT rules follow the regular tax system and don’t subject gains on donations of public company shares to tax. The proposed rules include 30% of capital gains on donations in the AMT base which is subject to minimum tax and reduces the donation tax credit by half. As a result, high-income taxpayers making large donations of cash or public company shares may have unintended tax consequences and should carefully consider the amount and timing of their donations.  

The proposed excessive interest and financing expenses limitation (EIFEL) rules will restrict the tax-deductible amount of interest and financing expenses for certain corporations and trusts, effective for taxation years starting on or after October 1, 2023. Once enacted, the EIFEL rules will have a significant impact on financing decisions and the tax compliance obligations for affected businesses and trusts. It’s important that you understand the potential impact to your business and plan accordingly.