Taxes and cash flow planning through COVID-19
By ATB Financial 30 June 2020 6 min read
Most Canadian businesses will be aware that federal corporate income tax balances and instalments that became due on or after March 18, 2020 have been extended to September 1, 2020. Similarly, Alberta corporate income tax balances and instalments that otherwise became due on or after March 18, 2020 have been extended to August 31, 2020. Many businesses have utilized these and other relief programs to address cash flow challenges over the last number of months.
As the deferred income tax payment deadlines approach, businesses should give consideration to what additional options may be available in terms of corporate income taxes and cash flow planning.
Reducing tax instalment payments for the current year
Instalment payments can affect a corporation’s cash flow by requiring a corporation to pre-pay some of its taxes before its year-end. When a corporation is able to defer, reduce or avoid the requirement to pay instalments, it may be able to utilize those funds in its business until its balance-due date, temporarily improving the corporation’s liquidity and access to cash.
Instalment payment calculation
Generally, corporations have to pay corporate income taxes by instalment payments throughout the year. A corporation can typically choose between three options for calculating the amount of these instalments:
- Estimated taxes for the current year;
- Actual taxes for the prior year;
- A combination of actual taxes for the prior year and the year before the prior year.
Instalment payment exceptions
Federal instalment payments are not required where taxes payable, before the deduction of refundable tax credits, are less than $3,000 for either the current or prior year.
Many Canadian controlled private corporations (CCPCs) are exempt from Alberta corporate tax instalments. Rather than paying provincial corporate income taxes by instalment, a CCPC can instead pay the tax balance three months following the corporation’s year-end, provided that it meets one of the following criteria:
- The corporation claims the small business deduction (SBD) and has taxable income of $500,000 or less in the current year;
- The corporation claimed the SBD and had taxable income of $500,000 or less in the prior year;
- The corporation’s Alberta taxes payable for the current or prior year were $2,000 or less.
Many CCPCs are also eligible for quarterly, rather than monthly, federal instalment payments.
Reducing instalment payments
Where a corporation’s tax liability is fairly consistent year-over-year, all three options may have a similar result and business owners may choose to utilize option 2 or 3 for certainty.
Due to the impacts of COVID-19, the estimated taxes for the current year may be lower than past years for many businesses. If this is the case for your business, it may make sense to consider utilizing option 1, instead, calculating your instalment payments based on estimated taxes for the current year. In this way, you may be able to reduce the amount of the tax instalments required on September 1 / August 31 and for the balance of the fiscal year.
Let’s take the example of a corporation that has a calendar year-end. For the past number of years, the corporation has generated consistent profits with federal corporate income taxes payable of $36,000 and $40,000 for the years ended December 31, 2019 and 2018 respectively. The corporation’s revenues have declined over the past few months as a result of COVID-19 and the business anticipates much lower taxes payable for the December 31, 2020 year-end with a current estimate of only $18,000.
Assuming the example corporation is not eligible for quarterly instalments, its federal tax instalment options would be calculated as follows:
- Option 1: 12 monthly instalments of $1,500 ($18,000/12)
- Option 2: 12 monthly instalments of $3,000 ($36,000/12)
- Option 3: 2 monthly instalments of $3,333 ($40,000/12) and 10 monthly instalments of $2,933 [($36,000-$6,666)/10]
By selecting option 1, the company can retain cash of $18,000 when compared to options 2 and 3.
Let’s assume that instalment payments of $3,333 were already paid in January and February pre-COVID and that no instalment payments have been made for March through August due to the deferred payment relief. This means that $5,334 would become payable on September 1 ($1,500 * 8 - $6,666) with further payments of $1,500 being required on each September 30, October 31, November 30 and December 31.
An instalment payment calculator can be found on your My Business Account.
Considering potential interest charges
While interest will not be charged if relevant payments are made by the extended deadlines, it’s important to note that the Canada Revenue Agency (CRA) and Alberta Tax and Revenue Administration (TRA) will charge compound daily interest on tax and instalment balances that remain overdue after September 1 and August 31, respectively. Relevant interest rates are 5 per cent (CRA) and 4.5 per cent (TRA) for Q3, 2020. Where instalment interest exceeds $1,000, instalment penalties may also be charged.
If you choose to use option 1 to calculate your instalments and underestimate your taxes for the current year, interest and penalty charges may result. Accurately forecasting your corporate taxes for the coming year may be challenging given the current uncertainty and instalment payments may need to be revisited if forecasts are adjusted.
Both the CRA and TRA use an offset method to calculate instalment interest. This means that if you underestimate your instalments earlier in the year, you can reduce or eliminate resulting interest charges by making an early payment for a subsequent instalment.
Utilizing tax losses
Some businesses may experience losses in the current year, rather than just a decline in taxable income. Losses may consist of both capital or non-capital losses. A capital loss may arise where a corporation has sold non-depreciable capital property (such as land or investments) for an amount lower than the property’s adjusted cost base. Non-capital losses arise when a corporation’s tax-deductible expenses exceed revenue in any given year.
If your corporation is now facing a current year non-capital loss resulting from the COVID-19 pandemic, you may have some options available to you to improve your cash flow situation. On filing your corporate tax return, you may receive a refund of previously paid instalments for the current year. Any losses can be carried back up to three years, to help recover taxes paid in a prior year. Recouping tax payments from current or prior years may provide your company with some much needed extra cash to weather continued poor economic conditions. Any remaining losses can be carried forward and utilized in a future tax year for up to 20 years.
If your corporation has had to dispose of non-depreciable property at a loss, 50 per cent of the capital loss (the allowable capital loss) will offset taxable capital gains earned in the same year. Generally, capital losses may only be used to offset capital gains, not to reduce other income. If a corporation has no capital gains in the current year, or if its allowable capital losses in the current year exceed taxable capital gains, the remaining capital loss is known as a net capital loss. A net capital loss can be carried back and applied against taxable capital gains realized in any of the three previous years. The net capital loss may also be carried forward indefinitely to be used against future taxable capital gains.
You may wish to consider filing your corporate tax return in a timely manner so as not to delay the receipt of any tax refund your business may be entitled to.
Additional considerations may exist with respect to loss consolidation strategies for corporate groups with more than one entity.
We recommend that you speak to your tax advisor to discuss these topics and the specific implications for your business. For more information on managing and forecasting cash flow for your business, see these related articles:
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This document has been prepared by ATB Wealth. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. The information provided in this article is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. This information is subject to change and ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund), ATB Investment Management Inc. and ATB Insurance Advisors Inc. reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents.