Do you dread preparing the accounting records for your corporate tax year end? We make the analysis of the investment component as painless as possible. Getting ready for your corporation’s year-end involves many moving parts. An ounce of prevention is worth a pound of cure, and when it comes to your corporation’s year-end, it’s best to be prepared to avoid brown envelopes and penalties from the Canada Revenue Agency (CRA).
Many steps can be taken throughout the year to stay organized, such as keeping up to date with the bookkeeping of your business, as well as obtaining tax slips, organizing receipts, keeping banking and investment statements, recording of business use-of-home and automobile expense information (mileage log, per cent used for conducting business), etc. For our clients who have corporate investment accounts, we make the accounting as easy as possible, which we will provide more detail on below.
As our corporate clients’ year-end approaches, we proactively reach out to our clients and run year-to-date realized gain loss reports, current holdings detail reports, etc. to identify tax loss selling opportunities, realized gains that can be used for a capital dividend election, and holdings that are good candidates for donations of shares in-kind, etc.
Tax-loss selling is the process of selling securities that have been lagging performance wise to offset capital gains that have been incurred during the taxation year. We do this for both our individual and corporate clients in non-registered (taxable) accounts. When markets have been performing well there are often no positions in a loss.
It is important to keep the timeframe in mind when doing tax-loss selling, if applicable. When a security is sold, it takes two days to settle. For example, if you have a Dec. 31 year-end, you will have to sell the security on, or before, December 29 (assuming these dates do not fall on a weekend) in order for the loss to count for that taxation year.
Realizing capital gains
One of our goals is to minimize the amount of taxes our clients pay over their lifetime. It can often be easy to focus on minimizing taxation in one-year alone. In certain circumstances, it can be beneficial to recognize capital gains gradually over time, rather than deferring most income and finding yourself in a situation where it will be too punitive tax wise.
One of the benefits of investing through a corporation is the ability to pay yourself a tax-free capital dividend through the Capital Dividend Account (CDA). The CDA is a notional tax account.
A notional tax account means that it does not have any cash balance and it is not reported on financial statements. In the CDA, various tax-free surpluses are tracked and then these amounts can be distributed to Canadian shareholders as tax-free dividends.
An example of a tax-free surplus is the non-taxable portion of capital gains. This gets added to the CDA and can be paid out tax-free to shareholder(s). In our previous article Understanding tax-free capital dividends there is further information on the CDA.
Opportunities to make charitable donations
Holding Companies that have investment portfolios receive a large benefit from donating shares of securities in-kind. Corporations receive not only a tax deduction worth the fair market value of the securities donated, but do not have to pay tax on the capital gain, and the full value of the capital gain is added to the Capital Dividend Account to be paid out tax free at a later date.
In our article Making charitable donations from a corporation we provide more information. Mapping out a donation strategy with your tax advisor and Portfolio Manager in advance of year-end can ensure that there is enough time to facilitate the donations before the end of the year.
Once our client’s tax advisors have mapped the above strategies out, as applicable, we communicate directly with the accountants to execute their strategy on our mutual client’s behalf.
During the year-end
For all our corporate clients we provide a comprehensive year-end package to them and their accountant. We liaise directly with many of our client’s accountants and provide the package right to them with our client’s consent. The package we provide contains the following information:
Transaction history report (both PDF and excel), sorted by:
- Currency exchanges
- Investment counsel fees — our fees are deductible for corporate accounts for income tax purposes.
- Interest income
- Canadian dividend income
- Foreign dividend income
- Dividend re-investment program transactions
By having the transaction history report sorted by transaction type and providing it in excel, it can make it easier for our clients’ accountants as they are able to take these different transactions and post summary journal entries at year-end, rather than multiple transactions throughout the year.
Tax slips (T5, T5008, T3, T1135)
For the T5 Statement of Investment Income, T5008 Statement of Securities Transactions, T3 Statement of Trust Income Allocations and Designations and T1135 Foreign Income Verification Statement, we have a system that generates them as needed to align with our client’s year-ends, and include these slips, where applicable, in the year-end tax package.
Realized gain (loss) report (both PDF and excel)
While our clients receive the T5008 Statement of Securities Transactions which details the cost paid and cost sold for an individual security, it can be cumbersome to manually enter each transaction into the tax return, and even more cumbersome to translate them back into Canadian dollars if they were foreign transactions. To help make our client’s and their accountant’s lives easier, we provide a realized gain (loss) report from our system which provides a summary of total cost, total proceeds and total realized gain (loss) at the bottom, converted into Canadian dollars for income tax purposes.
Holdings detail report (both PDF and excel)
By providing a current holdings detail report to our client’s accountants, it allows them to obtain an idea of the amount of unrealized capital gains, or tax loss selling opportunities, that are available to the client.
When corporate clients open an investment account, the default is to obtain multiple copies of statements. Typically the corporation gets a copy, as does each trading authority. In most cases, we update the statement preferences so only one copy is received; however, there are instances where we do not cancel the extra copy as it can be useful to provide to the accountant during tax time.
More and more of our clients are switching to paperless records. It is easy for us to send PDF copies of statements securely to our client’s accountants as part of the year-end tax package, and it means less items that you need to compile yourself.
Timing and deadlines
Corporations have six months after their year-end to file their tax return. For example, if your tax year-end falls on September 30, you have until March 31 to file your taxes. If taxes are filed after March 31, you may then be subject to penalties.
Typically, corporations pay their taxes in installments, either monthly or quarterly. While the corporate tax return does not have to be filed until six months after year-end, the balance of taxes owing is due on the balance-due date which is either two or three months after the tax year-end.
Your balance-due day is determined based on some criteria. Generally, all corporate taxes are due two months after year-end. This can be extended to three months after year-end if the first two conditions below are met, as well as one of conditions three or four below:
1) the corporation is a Canadian-controlled private corporation (CCPC) throughout the tax year; and
2) the corporation claimed the small business deduction for the current or previous tax year; plus one of the following:
3) the corporation’s taxable income for the previous tax year does not exceed its business limit for that tax year (if the corporation is not associated with any other corporation during the tax year); or
4) the total of the taxable incomes of all the associated corporations for their last tax year ending in the previous calendar year does not exceed the total of their business limits for those tax years (if the corporation is associated with any other corporation during the tax year).
As our clients are going through their corporate year-end, we are providing information to them and their accountants. On the flip side, after the year-end is completed, we request copies of the financial statements to determine if there are any transactions which we need to assist with such as dividends payable, credits to shareholder loans, and preparing letters of direction to move money from the corporate account to the client’s individual non-registered (taxable) account.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email firstname.lastname@example.org or visit greenardgroup.com/secondopinion