New rules around small business taxation take effect in 2019, and we wanted to highlight some of the strategies that corporations can use to reduce the impact of those changes. These strategies were outlined in an article by Curtis Davis in Advisor's Edge.
There are three types of strategies:
1) Reduce Active Business Income - If you can reasonably forecast your passive income, you can also predict your small business deduction. If you can reduce active business income to be at or below your small business deduction, you can avoid higher general corporate tax rate.
Some ways to reduce active business income include:
Increasing salaries and bonus income reported on a T4 as they are deducted from active business income.
Paying spouses and children a salary. As long as the salary is reasonable for the job, income splitting is still available.
2) Reduce Passive Income - Directly reducing passive income or passive investment assets can also lessen the blow of upcoming changes.
Some ways of doing this include:
Repay shareholder loans: use passive assets to repay outstanding loans.
Purchase corporate-owned life insurance: investments in a life insurance policy are generally tax sheltered, which can reduce passive investment asset balances while addressing a planning need for owners and your corporation.
Pay dividends from the Capital Dividend Account: Fund capital dividends with funds from passive assets
3) A Combination of Both - The following strategies have the benefit of lowering both active and passive income:
Make a corporate donation: corporate donations create a deduction against income and may reduce passive investments. In-kind donations attract a 0% capital gains inclusion rate and do not increase the current year’s passive income. Since 100% of the capital gain is tax-free, the entire gain is added to the capital dividend account, which could be paid to the shareholder tax-free.