December is busy for everyone, but it's also your last chance to take advantage of a few tax planning opportunities that could save you money this tax season. Year-end tax planning can help small business owners maximize deductions, manage cash flow, take advantage of tax credits, avoid penalties and make strategic decisions.
First, assess your financial records to ensure they're accurate and up-to-date. Organize all your receipts, invoices and expenses. Here’s a checklist of things to do before January sneaks up:
Defer a loan payment
Yes, we’re really telling you to defer a payment. In fact, many lenders allow a one-month break from principal payments around Christmas. This can be a great way to squeeze extra cash out of your pockets to help cover holiday expenses. Car payments and mortgages will be big ones; just ask your lender what they can do for you.
TD Bank calls this option a Payment Pause, and RBC calls it Skip-A-Payment. These options allow you to skip the equivalent of one monthly mortgage payment once a year, up to four times during the amortization of your mortgage. The interest missed from that skipped payment is added to the mortgage principal.
Maximize your medical expenses
Your medical expense deduction is your eligible expenses during the year less $2,635 (or 3% of your income, whichever is less). In other words, if you make more than $75,000 per year and have $2,000 in medical expenses this year, you would get no deduction for tax purposes. If you had $3,000 in medical expenses, your deduction would be $365 ($3,000 - $2,635). This means that if your expenses are over $2,635 during the year, you want to maximize the deduction.
Fill your prescriptions, get those new glasses, see your chiropractor, dentist, physiotherapist, psychologist, nutritionist, dietitian, and even stock up on those medical cannabis products that have a long shelf-life — take action now and get the most tax dollars back in April. (Perhaps it goes without saying that you need to hold onto these receipts and statements. Here's a list of 17 critical documents to keep safe for tax time.)
Use your health spending account
The unused balance in most HSAs expires on December 31, so use it or lose it! Again, fill your prescriptions, order glasses or prescription sunglasses, get a massage, new orthopedics — any discretionary health spending you can do to use up that balance.
Sell investments
In certain circumstances, buying or selling some investments before December 31 can make sense. You may have realized some significant capital gains during the year; in this case, you could sell some of those loser investments at a loss, lowering your taxable capital gain.
If your investments are held in a corporation, selling shares that have appreciated significantly may also be prudent to crystalize the capital gain. Half the capital gain is currently added to the Capital Dividend Account, from which a tax-free dividend can be paid. Remember that you must pay tax on half the capital gain to get the other half tax-free.
Make donations
Get back 50% of your donations (over $200) in saved taxes. Get 25% back on your first $200 in donations. You can save your tax receipts for up to five years and claim them all in one year to maximize the 50% rebate. For more details, read our blog post about Donating Responsibly.
Pay year-end bonuses or dividends
When you have a small business, you have flexibility when it comes to paying your own compensation. Depending on your income this year and your expected income next year, you may save some tax dollars by optimizing the timing of a bonus or dividend to yourself or your staff. Run the numbers and make an informed decision — don’t be afraid to ask us for help with this.
Be aware of the Tax On Split Income rules if you plan to cut a family member a cheque. For a more detailed discussion on this topic, please refer to our blog on Income Sprinkling.
Make year-end purchases
For sole proprietors and corporations with a December 31 year-end, this is your last chance to maximize your write-offs and minimize taxes for the year. Ordering and paying for that new computer or a new piece of equipment might make sense before December 31.
Plan for next year
Use this time to start planning for the upcoming year. Set financial goals, create a budget and strategize for your business’s future growth.
Consult a tax professional
Have questions about year-end tax planning? We’d love to help. We have CPAs with extensive knowledge of the changing tax laws – including ones related to self-employed professionals like yourself. We provide bookkeeping and tax services to small business owners in Okotoks and Calgary, including deductions, write-offs, expenses, tax returns, GST filing and more. Contact us here.
Read more about Corporate Tax and Personal Tax topics that may be helpful to you and your small business.
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