Why Tax Planning Should Start Before Year-End

Tax preparation vs. tax planning

Tax preparation looks backward. It reports what already happened, accurately and on time.

Tax planning looks forward. It considers decisions you haven't made yet, such as how to pay yourself, when to buy equipment, or how to structure a transaction, and how those choices will affect your taxes.

Both matter. But once the year is over, preparation can only record the result. The opportunity to influence it has mostly passed.

Why the timing matters

Many tax outcomes depend on what happens on or before your year-end date:

• When an asset is acquired and available for use affects how much tax depreciation (capital cost allowance) can be claimed that year.
• Owner compensation decisions, such as a salary or bonus, need to be planned around the year-end so they're deductible in the right year and paid on time.
• Dividends need to be declared and properly documented.
• Expenses are generally deducted in the year they're incurred, so timing of significant purchases can matter.
• Losses on investments generally need to be realized before year-end to be used that year.
• Corporate structure changes, such as adding a holding company or changing share ownership, take time to plan and implement properly.

Waiting until the return is being prepared usually means these options are gone.

A pre-year-end review: what to look at

About two to three months before your fiscal year-end is a good time for a planning conversation. Topics often include:

1. Projected profit. Where is the year likely to land? Up-to-date bookkeeping makes this much more reliable.
2. Owner pay. What mix of salary and dividends fits your cash needs, RRSP goals and family situation? See Salary vs. Dividends for Canadian Business Owners.
3. Major purchases. Are equipment, vehicles or technology purchases planned, and does timing matter?
4. Retained earnings and investments. How much cash is building up in the corporation, and how is it invested? Passive investment income can affect access to the small business deduction.
5. Family members. Are family members involved in the business, and are any payments to them reasonable and compliant with the tax on split income (TOSI) rules?
6. Shareholder loans. Are there balances owed to or from the corporation that need to be addressed?
7. SR&ED and incentives. Is the business doing work that might qualify for SR&ED or Alberta's Innovation Employment Grant?
8. Instalments and cash flow. What tax will be owed, and when?
9. Longer-term plans. Are you considering a sale, succession, a new business line or retirement in the next few years?

Planning is ongoing, not a one-time event

A single meeting before year-end is valuable, but the best results usually come from treating tax planning as part of running the business. Major decisions, such as buying a building, bringing in a partner, hiring family members, or starting a new venture, are best discussed before they happen.

What tax planning is not

Good tax planning is about making informed, legitimate choices within the rules. It isn't about aggressive schemes or arrangements that rely on avoiding scrutiny. A practical plan should make sense for your business even before tax is considered, and it should be documented properly.

Common questions

This article is general information only and is not tax advice for your specific situation. Refer to the Canada Revenue Agency for current rules.