Owner-managers should address the following considerations before the 2010 year-end; some items have continuing relevance and should also be reviewed in 2011. (For tips on establishing an owner-manager's optimal salary-dividend mix, see "Owner-Manager Year-End Tips, Part 1," Canadian Tax Highlights, October 2010.)
•Decreases in small business rates--in Newfoundland and Labrador and Nova Scotia (for 2011), Manitoba (on December 1, 2010), Ontario (on July 1, 2010), and Prince Edward Island (on April 1, 2010)--may benefit an affected corporation that defers income until after 2010 by maximizing 2010 discretionary deductions such as CCA. After 2010, the small business threshold in Yukon increases from $400,000 to $500,000.
•A corporation subject to the general corporate income tax rate may wish to defer income by maximizing discretionary deductions in 2010 to benefit from staggered reductions in the federal rate: that rate falls from 18 percent in 2010 to 16.5 percent in 2011 and to 15 percent in 2012. After 2010, general rates also decline in British Columbia, New Brunswick, and Ontario. However, New Brunswick's new government may revise the scheduled corporate tax decreases.
•For a corporation to claim CCA, depreciable assets must be purchased by, and be available for use at, the corporation's year-end. The annual CCA deduction is enhanced (1) for computers and systems software, from 55 percent declining balance to 100 percent (no half-year rule) for purchases made before February 2011; and (2) for M & P equipment, from 30 percent declining balance to 50 percent straightline on purchases made before 2012.
•Reserves for doubtful accounts receivable or inventory obsolescence should be identified and claimed at year-end.
•If goods were sold in 2010 and the proceeds are receivable after year-end, the income may be deferred by claiming a reserve over a maximum of three years.
•Ensure that intercompany charges are reasonable in light of changes in the economy, and consider adjustments to the charges to reduce overall taxes paid by the related group. For example, a reasonable markup may be charged for services provided by related corporations.
•A corporation with annual gross revenues exceeding $1 million must generally e-file its corporate income tax return to avoid penalties, commencing with the 2011 taxation year. Likewise, a corporation that submits more than 50 information returns annually (down from 500) must e-file its information returns starting in 2011.
•A GST/HST registrant that meets certain criteria (such as making, on an associated basis, annual taxable supplies exceeding $1.5 million) must file its GST/HST returns electronically for reporting periods ending after June 30, 2010.
•For partnerships with fiscal periods ending after December 31, 2010, the CRA has changed its administrative policy on the filing criteria for partnership returns. The current requirement to file a partnership information return based on the number of partners is being replaced with a requirement to file that is related to financial thresholds and partner structure.
•Be aware that under federal draft legislation, an "avoidance transaction" that meets certain conditions is a "reportable transaction" that must be reported to the CRA. The new rule applies generally for transactions entered into after 2010 and to transactions that are part of a series of transactions completed after 2010. Quebec draft legislation also requires the disclosure of certain aggressive tax-planning transactions, which applies to such transactions that are generally carried out after October 14, 2009.
•Claim M & P tax credits, which are available in Manitoba, Nova Scotia, Prince Edward Island, Quebec, and Saskatchewan. Nova Scotia introduced a 10 percent credit for eligible M & P property that was acquired after 2009 and cost more than $50,000; the maximum annual credit is $1 million.
•Take advantage of media tax incentives, which are available in most federal, provincial, and territorial jurisdictions. Media incentives were enhanced or extended in British Columbia, Manitoba, New Brunswick, Ontario, and Quebec.
•Claim SR & ED tax credits, which are available in all provinces and territories (except Prince Edward Island and Yukon). Manitoba's 20 percent credit became fully refundable for eligible expenditures incurred in Manitoba after 2009 under a contract with a qualifying research institute for new technologies and biotechnologies, and partially refundable (25 percent refundable in 2011 and 50 percent refundable after 2011) for in-house R & D expenditures after 2010. Enhancements to the Quebec R & D wage tax credit affect clinical trial work and arm's-length contracting.
•Take advantage of other federal and provincial tax incentives and changes to those incentives. For example, Manitoba's co-op education and apprenticeship tax credits will be enhanced starting in 2011, and Quebec's e-business and book-publishing tax credits were enhanced in 2010.
Donald E. Carson and Ruby Lim
PricewaterhouseCoopers LLP, Toronto
Canadian Tax Highlights
Volume 18, Number 11, November 2010
©2010, Canadian Tax Foundation