Tax tips for business owners navigating the pandemic

For starters, “Do not be sending any remittances” to the CRA for income tax or GST, said Dave Walsh, partner and tax service line leader at BDO Canada in Ottawa.

Tax that becomes owing on or after March 18 has been deferred to Sept. 1, with no interest or penalties accumulating. GST payment and customs duties are extended to June 30.

While business owners can defer tax payments, they may want to file early if they’re expecting a refund.

Cash flow can also be boosted with capital losses. “Where there are losses being realized, take advantage of loss carry-backs,” said Dino Infanti, partner and national leader at KPMG Enterprise Tax in Vancouver.

He added that such planning includes considering losses within the context of corporate structure, where a business owner has multiple corporations, for example.

Another way to generate cash is through return of capital, whereby the business owner receives the capital they already invested, in mutual funds, for example.

“The impact of a return of capital is your adjusted cost base […] will fall over time,” said Frank Di Pietro, assistant vice-president of tax and estate planning at Mackenzie Investments.

“What you’re doing is essentially pushing a potentially larger capital gain out into the future.”

However, no immediate tax implications would result for the business, and cash flow would increase, he said.

Other tax planning ideas

If a business owner has excess funds and wants to save on tax, Walsh suggested they consider a prescribed rate loan to split investment income with a family member in a lower tax bracket. The idea may be particularly appealing at current low rates, he said.

The CRA hasn’t yet published its prescribed rates for Q2. The current rate for a prescribed loan is 2% and could potentially move lower considering recent interest rate cuts by the central bank. Whether 2% or less, “you’re going to lock in at a really good rate,” Di Pietro said.

Now may also be an ideal time for business owners with passive investments in their corporations to address the passive income tax rules. Some business owners haven’t dealt with the rules in order to avoid triggering large gains.

With recent poor market performance, “those capital gains may not be as large as they were a few months ago,” Di Pietro said. “Now may be a better time to reallocate the investments to be more tax-efficient.”

Business owners who previously triggered an estate freeze, which transfers future growth to their children and limits capital gains tax, may want to consider a refreeze.

“Because we’ve seen a decline in values [of businesses], it might make sense to do a refreeze,” Infanti said. Other business owners may also want to consider the strategy for the first time.

Other tax items for business owners to consider are home office deductions, which may come into play on 2020 tax returns if their employees have been working from home, Infanti said.

To deduct home office expenses, employers must complete and sign form T2200. For the 2020 tax year, “that will be a topic of discussion, in terms of whether an employee is entitled to claim home office expenses,” he said.

Infanti also suggested business owners make sure “the housekeeping matters are looked after,” including wills, healthcare agreements, powers of attorney and probate fee planning.

Highlights of federal support

Loans for businesses are being offered through the Business Credit Availability Program (BCAP), which is providing $65 billion of support through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). Those agencies are providing credit through banks.

The Canada Emergency Business Account allows for bank loans of up to $40,000 for small businesses. The loans are interest-free for the first year (according to the BDC website) or until Dec. 31, 2022 (according the CIBC, National Bank, Scotiabank and TD websites), and up to $10,000 can be waived for repayment. Businesses must demonstrate they paid between $50,000 and $1 million in total payroll in 2019.

These programs will be available in mid-April through businesses’ current financial institutions.

While no limits exist for financial support for a single business, the BDC, EDC and financial institutions will “continue to employ internal risk management practices for granting credit,” the government says.

Farmers will receive financial support through Farm Credit Canada.

For BCAP loans, Infanti said that “if you had a good business before and it’s still a good business, and you’re feeling the impact as a result of Covid-19, then absent other details, you may be eligible.”

Demonstrating need for the funds shouldn’t be onerous.

“If a business is able to demonstrate that they need the funds to keep people on the payroll and operations going, [the programs] seem to be very generous with the funding,” Walsh said, adding that the application forms aren’t complicated.

Infanti expects the application process will be typical, with businesses providing requisite financial information and forecasts. “Treat [the programs] like any other business loan,” he said.

While a loan may be easy to secure, taking on debt is making many business owners nervous.

“There are a lot of business owners who don’t want to take on debt and are worried about having to repay it,” Di Pietro said. “The loans don’t replace lost revenue.”

Some business owners are hoping for subsidies or grants, not loans, he said.

The emergency wage subsidy announced on Wednesday is for eligible employers of all sizes and sectors (except the public sector) that see a drop in revenue of 30%. Organizations that don’t qualify may still qualify for the previously announced wage subsidy of 10%.

The work-sharing program — whereby employees whose hours get reduced by an average of 10% to 60% can claim employment insurance for lost wages — has been extended to 76 weeks from 38. Walsh said business owners may want to consider the program so that skilled employees are retained for when the economy returns to its usual pace.

“Business owners have changed their mind because of that program,” he said, meaning they’ve made the decision to cut hours instead of employees. “When the economy and the business comes back, you’ve got your same level of workforce.”

Infanti offered another forward-looking suggestion for employers: consider establishing a supplementary unemployment benefit plan. The plan tops up the wages of employees during periods of temporary or indefinite unemployment.

Di Pietro said that business owners should take advantage of municipal support, as well.

“If you’re a business owner in any part of the country, stay on top of what local governments are doing,” he said. That could be deferrals on property tax and utilities.

Walsh also suggested business owners take time to consider credits or incentives they may not have used before — “no matter how small the claim.”

For example, the Scientific Research and Experimental Development (SR&ED) program’s tax incentives may provide a refund or investment tax credit. The latter may be refundable for private businesses, Walsh said.

Read a summary of the federal support available for businesses (as well as individuals).