Tax planning to maximize your tax savings should be an ongoing process throughout the year, but there are definitely measures that can be taken in the last couple of months before year-end to ensure you receive the maximum tax payout you’re entitled.
A complete tax assessment performed before your year-end can help you make some important tax-management decisions so you save money and pay less tax.
A year-end tax plan presents an opportunity for you to minimize your taxes and improve your financial position come tax season next spring; resulting in a larger tax return or at least a lot less tax owing.
Although the tax consequences of some financial decisions may not always take precedence, knowing the options you have will lead to some better decision making.
Timing Business Decisions Can Be Everything
The standard strategies in year-end tax planning are simple:
- Defer income and taxable capital gains until the next tax year.
- Bring anticipated tax-deductible expenses and capital losses into the current tax year. The logic of this is particularly sound if your marginal tax rate is expected to be higher this year than in future years.
Farmers using the “cash method” for reporting taxable income can take advantage of several strategies to reduce their net farm income prior to year-end. One of the keys to paying less tax is to maximize your expenses to offset taxable income.
Use Deferral Effectively
The basic idea of tax deferral is that it is better to pay tax later rather than sooner. This is related to the time value of money and the assumption that you’re being taxed at a lower marginal income tax rate in retirement.
Also, if you have depreciable assets (machinery or equipment) to sell, it may be better to wait until the new fiscal year. The delay lets you claim another year of capital cost allowance (CCA).
Alternatively, if you are in the market for depreciable assets, buy them before your fiscal year-end to increase your CCA claim by half of the annual rate in the year the item is acquired.
Another example of this is deferred cash grain tickets. If the ticket provides for payment after year-end, sell crop inventories in one year while deferring taxes on the sale until the following year.
Even when a deferred cash grain ticket is used to pay for expenses in the current year and the expenses are deducted in the same year, CRA has allowed the income to be deferred.
Advances, Prepayments and Increases
Advances received under the Agricultural Marketing Programs Act are treated as loans. These payments put cash in your pocket but do not have to be included in income until the crops are sold.
Farmers can also benefit from the common practice of prepaying for farm inputs.
Be aware that prepaying inputs is not considered a deductible expense unless it meets a few criteria. Your farm tax specialist can help you navigate this.
You can also increase purchases of inventory as long as you don’t create a loss. However, this method has a downside.
Assuming a profit would have been realized before the purchase of inventory, deferring income in successive years using this practice can create a sizable tax liability when the time comes to sell the farm or exit the business.
Offer Non-Cash Bonuses or Gifts
Employees are eligible for 2 non-cash gifts a year totaling no more than $500.
Such non-cash gifts (gift certificates are considered cash) are deductible for the employer but not taxable in the hands of the employee.
Be aware that if the gifts exceed $500 (including all applicable taxes such as GST, HST and PST), the entire amount is considered a taxable benefit to the employee – not just the amount that exceeds $500.
You Can Pay Less Tax This Year
FBC’s in-depth year-end tax planning service allows us to work with you to forecast your year-end financial position and provide you with a clear idea of your potential tax liability – and what you might be able to do to reduce it.
It’s just one of the many services we offer but it might be the best one for you to take advantage of right now, while there’s still time to affect your income taxes for 2016.
Our local tax specialists are armed with a toolkit of proven tax strategies to help you keep more of your hard-earned money. Call now to schedule your year-end tax plan, 1.800.265.1002.