In times of crises such as the COVID-19 pandemic, businesses forced to shut down are affected the most by their loss in revenues. During this time, liquidity is key and tax advisors everywhere are working to leverage every government assistance possible to keep these businesses afloat.
These are some of the recommendations provided by tax advisors.
Firstly, no payments of any kind should be made to the CRA for any income tax or GST purposes as recommended by Dave Walsh a partner at BDO Canada.
As announced by the CRA, any taxes owed on March 18 or after, have now been deferred to Sept 1 with no interest or penalties. This allows businesses to defer their taxes until business resumes closer to normal standards providing businesses with the liquidity, they require the most right now. While deferring is an option, those businesses expecting a tax refund are welcome to file their taxes early to receive their refund.
With the option of loss carry backs, cash flow can also be increased with capital losses says Dino Infanti, a partner at KPMG Enterprise Tax in Vancouver.
An additional way of increasing cash flow is through the return of capital. The owner can receive the capital they have already invested in mutual funds for example as a means of increasing cash flow. By doing so, the business pushes out potentially larger capital gain into the future. By avoiding immediate tax implications, business cash flow can increase.
Next, if a business owner has excess funds and would like to save on taxes, they could consider splitting investment income with a family member in a lower tax bracket via prescribed loans and this could be particularly appealing given the current low rates mentioned Walsh.
While the new prescribed rate for Q2 has yet to be published by CRA, the current 2% could move lower as a result of the interest rate cuts by the central bank. At either rate, customers are going to have the chance to lock in at a good rate. Alongside this, it is also recommended that now is a great time for business owners to address passive income rules relative to passive investments in their corporations.
Due to the recent decrease in revenues and overall poor market performance, capital gains now may not be as large as they have been in the past and allow for business owners to reallocate their investments in more tax-efficient brackets.
Some other items for business owners to keep in mind are home office deductions that could affect 2020 tax returns if their organization is capable of accommodating for work from home. In order to deduct home office expenses, business owners must complete and sign form T2200 for the 2020 tax year for which it will be determined whether an employee is entitled to claim home office expenses.
Infanti also included that business owners should make sure that “the housekeeping matters are looked after” mentioning wills, healthcare agreements, powers of attorney and probate fee planning.
Federally, the government has put forth great effort in providing resources for businesses and individuals to access the money they need during this time of economic difficulty. Some of the provided programs are mentioned.
The Business Credit Availability Program (BCAP) is one program that is working to provide $65 billion of support through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). This support comes in ways of direct lending and other forms in attempt to fill gaps in market access and leverage additional lending by private sector institutions. More information regarding the BCAP can be found here
The Canada Emergency Business Account or CEBA provides small business to take loans from financial institutions for amounts up to $40,000 and are interest free until Dec 31, 2022. An amount of up to $10,000 of these loans can be waived if the other $30,000 is repaid by Dec 31, 2022 after which the left-over amount then becomes a loan. Please contact your financial institution for additional information regarding CEBA and its availability.
Programs have been designed to ensure that for those businesses which require funds and are able to demonstrate their need, there are generous amounts readily available through various means.
Additionally, Walsh also recommended businesses to consider all means of tax claims “no matter how small the claim” to improve current cash flow. These means include filing a SR&ED claim to CRA regardless of the size of the claim.
Specifically, the Scientific Research and Experimental Development (SR&ED) tax credit program along with its tax incentives and could provide either a liquid tax refund or an investment tax credit that could also be refundable for private businesses. This research and development tax credit can be of benefit and of many uses for businesses given the current COVID-19 pandemic that requires additional R&D to help develop a solution.