Last month, we emphasized the relevance of taking advantage of the lull caused by the pandemic to carry out a corporate update for your business. The second part of this theme today addresses the tax and accounting aspects. While it is wise to consult a professional to address your questions, you can still perform certain checks yourself to avoid unpleasant surprises.
Check the balance of cumulative tax accounts. The tax law provides for the creation of certain accounts, such as the Capital Dividend Account (CDA), the General Rate Income Account (GRIA), and the Refundable Dividend Tax On Hand (RDTOH) accounts. A positive balance in these accounts generally allows the company to either pay a dividend to the shareholder on a tax-free basis or at a lower tax rate, or to request a refund of some of the tax it has paid (hence the name “refundable tax”). However, in the case of dividend payments, if the amount exceeds the balance of the account, significant penalties could be imposed by tax authorities. Since prevention is better than cure, it is wise to compare the company’s data with that of tax authorities, as discrepancies may have arisen over the years, especially due to a change in the accounting firm. Moreover, some balances are available on the “My Account” portal at the Canada Revenue Agency: another reason to register!
Check public records, especially if you have a sole proprietorship. Indeed, a legal mortgage may have been registered against your property or a property you own if, for example, you have a tax debt and have ignored government notices. Since a legal mortgage could be an obstacle to the sale or refinancing of the property, it is advisable to ensure that you respond promptly to any notices sent by tax authorities. Checking with the Land Registry and the Registry of Personal and Movable Real Property involves minimal fees and can save you serious headaches.
Check overdue accounts.
Indeed, the law provides a three-year limitation period for rights related to the recovery of a debt, after which the statute of limitations can be raised against the company if it still initiates legal action. Consequently, it is necessary to file a statement of claim with the court within this period, as referring the matter to a collection agency does not suspend the limitation period! Most legal fees incurred are deductible, so rest assured.
Moreover, if you intend to claim a deduction for a bad debt in the calculation of the company’s income (whether an individual or a corporation), note that there are specific criteria governing eligibility for this deduction. Failure to meet these criteria could result in the deduction being denied. Generally, you must be able to demonstrate reasonable efforts to collect the amounts owed to the company, including through actual collection attempts (sending a demand letter, engaging a collection agency, etc.) that have been unsuccessful.
Review your tax planning. If your operations are suspended or slowed down and you have dormant income in bank accounts, it may be time to consider the best use for it. Is it relevant to maintain a high balance? Is it advantageous to use it for investments? Is it the right time to purchase assets (equipment, vehicles, etc.)?
Some entrepreneurs may be tempted to invest these amounts in a sector unrelated to the business, such as real estate. However, this type of investment also has tax consequences that you will need to take into account.
Finally, if retirement is on the horizon, this could be the perfect time to proceed with a reorganization to integrate the next generation while protecting the value accumulated in the business through your hard work.
Advisory
While waiting for the economic context to return to normal, take advantage of the current period of calm to assess your business situation. A change of direction may be desirable, or even a reorganization, to optimize the company’s tax situation. Professionals, including tax experts and our legal team, an invaluable source of advice, can guide you through these processes.
WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.
