Business owners-managers put money in and take money out on a regular basis during the year, and at the same time often use the business bank account for what may appear to be personal expenditures. This often leads to shareholder advance balances at year end and some major bookkeeping challenges to boot.
These balances are often part of the consideration to determine shareholder bonuses and dividends at year-end, the characterization of which often takes places after year end: A challenge for everyone involved (legal and accounting professionals in particular) to document and execute the appropriate resolutions.
2017 presents some additional challenges in this regard, for Canadian and US taxpayers.
In Canada, 2017 was the last year that dividends could be distributed freely to adult family members as result of the new tax measures on splitting income which came into effect in 2018 and with estate planning ramifications.
In the United States, the recently passed tax reform bill introduces a transitional tax on US shareholders of corporations on the tax-based earnings of the corporation, including those foreign-owned. Canadian personal taxes and non-resident withholding taxes can be used as partial deductions to this transitional tax. US resident shareholders of Canadian closely held corporations who wish to generate Canadian tax to offset this transitional tax will want dividends paid in 2017.
To many of us in the planning world, dating resolutions for this past year may pose more risk than usual. Generally, the Canada Revenue Agency (“CRA”) do not challenge the dating of these documents – in fact as I understand it, the Income Tax Act contains no specific provision with dating or amending documents retroactively. But the CRA will likely take some additional interest in the dating of resolutions for 2017 given the new tax measures. Possibly the Internal Revenue Agency in the US might as well. Bottom line all of us want to avoid the appearance of “backdating” and/or retroactive tax planning which may prove to be ineffective in the end.
I always encourage my clients and contacts to discuss their remuneration plans and strategies with their legal and tax professionals. For 2017, I would urge them to do so, if it is not too late to do so.
Acknowledgements to Kevin Nightingale of MNP and John Sorensen of Gowlings for their thoughtful article in Tax Topics (issued by Wolters Kluwer) on this subject.