By David Logan - Tuesday, July 7th, 2009

Though it is a cliché, it does bear repeating as a simple, unavoidable truth – nothing is as certain as death and taxes. And while we can always hope that the first is far off, the latter will occur with frequent and unavoidable regularity.

As a business that may be struggling, or proactively looking at ways to cut costs and improve cash flow, there are few respites from one’s tax obligations. Simply put, government at any level is a tax collector – taxes are, after all, its principal source of revenue. This applies in good times and bad. If you’re a business today in Windsor, for example, where the tribulations of the auto sector are having a profound impact on the local economy, your taxes will be due regardless of whatever damage is being dealt to your bottom line.

There is no substitute for meeting your tax obligations in a timely and consistent manner and adopting a policy of good corporate governance by providing full disclosure, regardless of the scale of your business. If you are honest and forthright with The Canada Revenue Agency (CRA), it will be much more inclined to be fair and co-operative with you.

For businesses that have a risk of being in arrears, CRA does offer a Voluntary Disclosure Program. This program allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not previously reported. If you are in arrears, you still have to pay what you owe plus interest, but you will avoid any other penalty or prosecution.

Various professional tax specialists also offer intervention services on a taxpayer’s behalf to apprise CRA of a particular situation and negotiate a settlement and a schedule of repayment to protect the taxpayer from punitive penalties or prosecution.

Tax Saving Tips

While there is no magic wand that will make one’s tax obligations disappear, there are a number of modest options a business can consider to mitigate or temporarily defer taxes in certain circumstances. However, these options often carry consequences and a business must discuss with a tax professional if the short-term benefit is worth any long-term implications.

These include:
 
Loss carryback

If you incurred a non-capital loss in your current fiscal year, or did have a loss last year, you can carry this loss back and apply it against a profit you made in any one of your previous three tax years. Applying this loss against a profitable year will provide a refund of some portion of the taxes you paid in that year. This refund can be used to boost your cash flow or otherwise finance your business. Note that this loss can also be carried forward a maximum of 20 years.

More information on carrying non-capital losses forward or back can be found on the CRA website.

Reducing income tax instalments

As a business or self-employed individual, you must pay income taxes by quarterly or monthly instalments. Many taxpayers elect to pay instalments that are based on the level of income their business earned in the previous tax year. But if you are having a weak year, this means you are paying more tax than you will owe for the current year. To preserve cash flow, review your instalments and see if it makes sense to reduce them.

The potential downside of this is that if business picks up in the remainder of the year, you may be now paying too little tax and will have to make up the difference, as well as pay interest, including instalment interest, on the outstanding tax owed.

Again, CRA’s website has more information on tax instalments.

Outsourcing services to reduce payroll costs

Typically, contractors are less costly than employees. The business does not have to carry, collect and remit employee costs such as Canada Pension Plan and Employment Insurance premiums, or provide vacation pay or provide group benefits.

On the other hand, contractors are less accountable to the employer beyond the immediate scope of work contained in their contract, and there may be less continuity for the business. Also consider and consult a professional about potential legal and CRA ramifications of switching employees to contractors if they are in essence still carrying out the same work and responsibilities.

Bonus out option

This avenue can provide a few months of breathing room for a business challenged to pay its corporate taxes on time. Rather than have the business owner draw a full salary from the corporation, pay out a portion of it as a bonus instead. The business can claim a deduction on this and the bonus must only be paid out within 180 days of fiscal year end. The payroll deductions at source are due by the normal remittance date, typically the 15th of the following month, after the bonus is paid.

Paying dividends in lieu of salary

Source payroll deductions can be avoided or reduced by paying dividends rather than salary, which will generally be taxed a lower rate. Dividends can only be paid to shareholders, so this will not apply to the non-shareholder employees. However, income in the form of dividends does not qualify as earned income for RRSP purposes, or as pensionable earnings, since no CPP contributions are being made. But again, this can be a short-term option to help preserve cash flow.

Incorporation

If you are in a situation where you are the sole proprietor of an unincorporated business, and are experiencing a very strong year, incorporating mid-year can defer the tax liability. A corporation also has the advantage of being a recognized entity, reducing the personal liability and exposure of the individuals involved in it for any debts or arrears incurred by the business. On the other hand, this can be a costly process and does carry higher annual administrative costs and create more paper work each year related to tax filing compared to remaining unincorporated.

Category: Expert Advice.
Industry: Retail, Technology, Services
Functional Area: Finance
Tags: arrears, Canada Revenue Agency, cash flow, CRA, loss carryback, P&L, profit and loss, profit margin, tax instalments, taxes, Voluntary Disclosure Program