Introduction
For most incorporated business owners, the tax planning conversation begins when the CPA calls in the spring to prepare the return. By then, the fiscal year has closed, income has been earned, and most of the decisions that would have reduced the tax bill have already been made — whether intentionally or by default.
Meaningful corporate tax planning happens before the year end, not after it. This article explains what should be reviewed and acted on in the months before a corporation's fiscal year closes.
Reviewing the Estimated Tax Position Before Year End
The starting point for year-end planning is understanding what the current year's income is likely to be. This requires up-to-date, accurate financial records — which is itself a reason why year-round bookkeeping quality matters, not just year-end bookkeeping accuracy.
A corporation whose books are current as of October or November can estimate its year-to-date income, project its full-year position, and identify whether action is needed before year end. A corporation whose books are three months behind has no useful information to act on.
Owner Compensation Decisions
The most significant year-end lever for most owner-managed corporations is compensation — the salary, bonus, or dividend paid to the owner before or after the fiscal year closes.
For corporations with a calendar year end (December 31), the window to pay a deductible salary or bonus that reduces corporate taxable income for the year is December 31. The bonus must be paid by June 30 of the following year to be deductible in the current year. If it is not paid within that window, the deduction is lost for the year.
For corporations with a non-calendar year end, the equivalent window is the final months of the fiscal year and the 180 days following.
Reviewing the estimated corporate income and the owner's personal income situation together — before the year closes — allows the compensation level to be set with both the corporate and personal tax positions in mind.
Capital Equipment Purchases
If the corporation is planning to acquire capital equipment — vehicles, machinery, computers, tools — the timing of that purchase relative to the fiscal year end affects which tax year the capital cost allowance (CCA) deduction begins.
Purchases made before year end allow CCA to be claimed in the current year. Depending on the CCA class, the deduction in the first year may be limited (the half-year rule applies to some classes) but is generally preferable to delaying the purchase to the following year.
For corporations close to the SBD limit, a capital purchase that creates additional deductions can help ensure more income falls within the lower-rate bracket.
Prepaid Expenses and Deferred Revenue
Within the rules permitted under the Income Tax Act, certain expenses paid before year end that relate to the following year may be deductible in the current year — specifically, prepaid expenses where the benefit extends no more than 12 months into the future. Reviewing upcoming expenses and considering whether prepayment makes sense is a legitimate timing tool.
Conversely, if the corporation has received advance payments for services not yet rendered, reviewing how deferred revenue is treated can affect the year's income recognition.
The Passive Income Check
For corporations with investment portfolios or retained earnings generating passive income, checking the adjusted aggregate investment income figure before year end is important. If the corporation is approaching the $50,000 AAII threshold that begins to reduce the small business deduction for the following year, understanding the likely passive income figure allows the owner and CPA to plan around it — whether through dividend distributions or other mechanisms.
Charitable Donations
Donations made by a corporation to registered charities generate a charitable donation tax credit that reduces corporate tax. Unlike personal donations, there is no maximum limit per year for corporations (subject to overall income limits). Charitable giving that is already planned may be more tax-efficient if timed before the fiscal year end.
When to Speak With a CPA
The most effective use of a CPA relationship for an incorporated business is not at filing time — it is at planning time, which is before the year closes. A CPA who reviews the year-to-date position in October or November and identifies available planning steps is providing advisory value that a March conversation cannot.