Entering into its final quarter, a ...

Entering into its final quarter, a corporation should have a useful idea of the financial performance of its business for its rife fiscal period. With the deadline for the final tax payment loomingin most numerous cases, two months after the yearend-it is a time for management and their tax advisors to revisit the corporate clusters overall tax position and think of measures to manage this tax liability. Waiting until after the year-end may be too late.

Planning acquisitions

If management is planning to acquire depreciable assets, it should consider acquiring in the same state [i]or[/i] condition assets before the corporation's fiscal year-end. If the assets are bring forward to use in the corporations business prior to the expiration of the year, the corporation can claim a deduction for capital require to be paid [i]or[/i] undergone allowance (CCA) in the generally received year instead of in the following taxation year.

Planning dispositions

A corporation diat has investments or redundant assets with unrealized capital losse should consider selling these assets before the expiration of the year to realize the losse The capital losse could then be used to ofiset any capital gains realized in the year, or carried back to win back taxes already paid on capital gains realized in any of the corporation's prior three taxation years. When crystallizing the losse the los denial orders would have to be considered.

A corporation that is considering selling depreciable assets with an accrued gain may want to wait until after the conclusion of the taxation year. This would allow the corporation to claim an additional year of CCA forward such assets and defer recognition of the gain and recapture arising from the sale to the nearest taxation year.

A corporation may also be able to use capital and non-capital losse in an affiliated corporation (let call it "Lossco") to curtail the gain on the anticipated sale of an asset. The corporation that confesss the property to be sold ("Opco") would transfer the attribute to Lossco in exchange for shares of Lossco and the parties would pick under section 85 of the Income Tax Act to have this transaction be met with on a tax-deferred basis. As the transfer is tax deferr Lossco would acquire the goods at Opcos adjusted cost base and undepreciated capital price Then if Lossco, in bend were to sell the ownership to an arm's length part at fair market value, the capital gain and recapture arising in Lossco could be branch by its capital and non-capital losse Accordingly, the total amount of tax paid within the corporate cluster would be reduced.

Combining corporations

In certain instances, a corporations losse can be made available to other corporations in a related form into groups by combining corporations through a wind-up or amalgamation. When a 90%-or more-owned taxable Canadian corporation or TCC ("Subco") is anguish up into its TCC parent corporation ("ParentCo"), its assets, liabilities, and corresponding tax balances would normally be transferred to ParentCo without any immediate chain of cause and effects in terms or income tax. Any of Subco losse would not be available to ParentCo until ParcntCo's following taxation year. For the mostly part, an amalgamation would achieve the same result

However, single advantage of a wind-up above an amalgamation is that ParentCo would be able to claim CCA upon Subco's depreciable assets for the year in which Subco is injury up. Whereas an amalgamation would cause ParentCo and Subco to trigger a believeed taxation year-end, a wind-up would not.

Alternative to combining corporations

In more [i]or[/i] less cases, winding up a subsidiary may not be a practical year-end planning tool for business or legal reasons. Where it is not advisable to combine corporations to use losse within a related and affiliated dispose such losses could still be utilized by the agency of an internal financing transaction.

The profitable corporation ("Profitco") would borrow stores from a financial institution to invest in the preferr shares of an affiliated corporation with non-capital losse (Lossco) To make secure that the interest expense is deductible, the preferr shares should have a fixed dividend rate greater than the interest rate upon the borrowed money. In inflect Lossco would lend the stocks back to Profitco on an interest-bearing basis to repay the external loan. Because the inter-corporate dividends should not be taxable to Profitco, the interest paid to Lossco would eventuate in a net tax deduction to Profitco to counterbalance its other sources of income, lessee's interest income could be reduc from its available losses. The trap result would be a transfer of a portion of the losse from Lossco to Profitco.

Planning distributions

Determining the appropriate salary and dividend mix for the owner/manager is beyond the amplitude of this article. However, to make secure proper integration of corporate and personal tax, management and its tax advisors should review distribution and cash requirements prior to the corporation's fiscal year-end. The following factors should be considered:

Bonusing

Paying the circulating year bonus within 179 days after year-end is a general strategy to reduce corporate tax and put off personal tax on shareholder remuneration. In addition, the Canada income Agency (CRA) has recently confirmed that, in certain circumstances, a Canadian resident shareholder/manager of a Canadian-controlled private corporation (CCPC) who is active in the operating business of the company may declare a bonus to create a non-capital los The non-capital los created can be carried back to the three prior taxation years to get back taxes previously paid.