Four year-end tax questions private companies should ask for a more profitable 2023

Considerations to help private companies protect wealth and support the bottom line

TORONTO, Dec. 7, 2022 /CNW/ - EY Canada's Four questions private companies should ask themselves now outlines the opportunities in the run-up to the calendar year end to unlock hidden capital, preserve wealth and support the bottom line.

"Faced with three years of pandemic disruption, extreme market volatility and an uncertain future, proactively mapping out the approach to tax planning for the year ahead should be a no-brainer for private companies," says Irina Rakhimova, a Tax senior manager, at EY Canada. "Companies that act now will be able to unlock a host of different opportunities to fuel progress, preserve wealth and support the bottom line."

Mapping out the approach to tax planning for the year ahead should be a no-brainer for private companies

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The EY article suggests Canadian private companies should consider these four questions to help build smart tax plans that are resilient to change over the year ahead:

1.    Is a cooling real estate market the right time to freeze your estate?

With real estate valuations dropping in recent months, the shift could also depress corporate valuations. For private companies, now may be the right time to consider an "estate freeze" — a tax planning transaction that involves fixing the value of an investment and redirecting the growth of that investment so it can be passed on to the next generation.

2.    Could a charitable foundation solidify your legacy and estate plan?

Charitable giving can result in a tax benefit associated with the principal amount of the endowment donation. Made personally, the donation amount generates a tax credit to offset tax payable, and a donation made by a corporation generates a corporate tax deduction of up to 75% of taxable income.

Charitable giving can become an important aspect of your overall tax planning strategy. If you are considering implementing an estate freeze or an estate plan, it's timely to also consider philanthropy as part of the overall plan. Establishing a private charitable foundation is one way to provide greater control over how gifts are invested and which organizations will benefit. It's important to carefully weigh the decision to set up a private foundation, since it carries a higher administrative burden. Read more in the November issue of TaxMatters@EY.

3.    Are you maximizing employee incentives to stave off quiet quitting?

In an inflationary market, wage and salary increases are not always the best solution to prevent employee resignations. Private company employers should consider alternative compensation options to recruit and retain talent. From restricted share unit plans (RSUs) that unlock long-term financial benefit to stock options that offer tax benefits, there are many unconventional methods private companies can incorporate into their strategic tax planning to develop a competitive edge in today's talent market.

4.    How can you combat rising interest rates right now?

Rising interest rates — paired with the now 3% prescribed rate applicable to taxable benefits on low-interest loans for employees and shareholders, and loans set up for family income splitting purposes — mean that CRA financing is becoming more expensive. Private companies can mitigate the impact of these inflationary measures by striking a balance between strategically monitoring installment payments while taking a conservative approach when estimating the amounts to be paid.

Find more tax insights and tips at ey.com/ca/taxmatters.

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This news release has been issued by Ernst & Young LLP.

SOURCE EY (Ernst & Young)

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