Planning now will pay off at tax time 2006

Year-end Tax-Tips from Chartered Accountants of Ontario

Toronto (November 29, 2005) - For Ontario's Chartered Accountants, every season is tax time as they plan to help clients and their businesses save, make and defer money. The end of the year is an especially important time for people to start thinking about their taxes with an eye to minimizing the hit.

Here are some recommended tax tips from the Institute of Chartered Accountants of Ontario.

For Businesses:

1) Make your "assets" work harder

If planning on buying equipment or other capital assets in the New Year, there are tax advantages in making the purchase before December 31, 2005.

For such purchases, you can claim one-half the normal capital cost allowance (CCA) in the year it is made. Thus, making the buy near year-end allows you to write-off more of the asset than has actually worn out, while creating additional savings for the company through an additional tax expense. In turn, this reduces the installments the business has to make in 2006, thus creating additional cash flow.

Also, remember that the capital asset is "available-for-use" prior to the end of the year in order to claim CCA.

2) Make inventory pay for its keep
Count inventory on hand at December 31, making note of all obsolete or damaged inventory, and then writing down or writing-off said inventory, which creates an additional tax deduction.

3) Have bad debts save you money
Review accounts receivable at December 31, 2005 to collect as much as possible. Take note, however, of old accounts so to determine whether to claim an allowance for doubtful debts, which creates an additional expense so the business does not pay tax on income until it is eventually collected.

4) Have charity start at home (or business!)
If your business regularly gives to charities, consider making donations prior to the year-end so to claim the benefit in this tax year.

5) Spend money to save money
Increase Expenses: Purchase items now - if cash flow permits - that your business will need in the immediate future so to maximize deductions for this year. Stock up on fax paper, printer cartridges, stationary and other office items.
Use caution, however, because expenses that are prepaid - such as rent and insurance - will not be deducted from your income until 2006.

For "Owner-manager" small business:

6) Make the corporation pay!
In certain situations, a corporation can be used to split income with family members who are 18 years of age or older. Family members can subscribe for shares of your small business corporation at fair market values. They then can receive dividends from your corporation out of its after-tax profits - and you can split income.

7) "Neither borrower nor lender be?"
Consider charging interest on any loans you've made to the company. If the owner-manager, as shareholder, has a loan with the corporation, interest at a reasonable rate can be paid to the shareholder instead of salary - with a deduction to the corporation and income to the shareholder, but payroll taxes avoided.

8) Compare dance partners
If you are lucky enough to run a larger "small enterprise" in Ontario with $5 million in taxable capital, aim to reduce that capital before year-end. Make sure to compare provincial capital taxes and Federal Large Corporations Tax, as some jurisdictions have begun to reduce - and in some cases eliminate - capital tax.

9) Keep it in the family
If your spouse or children work for you, consider paying them a reasonable, market-rate salary. Salaries paid reduce your income while at the same time are taxed in their hands, possibly at lower marginal rates than if the income had been paid to you. They also provide family members with earned income for RRSP contributions.

For Independent Professionals:

10) "Time is money" - and keep the money for longer!
If you are a professional who charge clients for hours worked, consider delaying invoicing until January 2006 so to postpone income until next year. Self-employed professionals do not have to report income from work-in-progress - only when they actually issue an invoice.

While all of the above tips are great at reducing income - care must be exercised:

Businesses that rely on bank financing may have certain key financial targets that must be maintained, such as debt/equity ratios;
Carefully evaluate these items to ensure that any tax-savings tip employed will not jeopardize other business commitments;
In addition, you must evaluate the overall status of your business if you project the business's income will be much higher in 2006 than in 2005. Delaying income or accelerating expenses may shift income that would be taxed at a much lower rate in 2005 to a much higher rate of tax in 2006.

As always with all such advice, consult your Chartered Accountant before implementing any of the above strategies, to make sure that they are best suited to your particular circumstances!

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About the Institute of Chartered Accountants of Ontario:
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario's 31,000 CAs and 3,500 CA students. Since 1879, the Institute has protected the public interest through the CA profession's high standards of qualification and the enforcement of its rules of professional conduct.

Reporters:

The Institute has qualified Chartered Accountants available for interviews on these and other tax topics during December 2005 holiday season. For more information or to arrange interviews with CA tax specialists in your community, please contact:

Perry Jensen
Associate Director of Media Relations
The Institute of Chartered Accountants of Ontario
Direct: 416-969-4271
Toll free: 1-800-387-0735 ext. 271
pjensen@icao.on.ca