Income-smoothing and other tax strategies

  • Nov 21, 2019
  • 2.5 min read

Business strategies and structures change – and so should tax plans, say tax experts.

According to tax experts, keeping tax plans up-to-date and ensuring they reflect reality is an important part of proactive business planning. A variety of tips can be employed to ensure the right goals are met.

Income smoothing

In a recent presentation to the Canadian Association of Farm Advisors, Shawn Deyell, a Guelph-based chartered professional accountant with RLB, says income smoothing is a useful method of ensuring long-term tax stability. It involves raising or lowering income levels to reduce the variation of actual farm income from year to year. 

This makes for a more predictable cash flow and stabilizes what might otherwise be wide fluctuations in the applicable tax rate. 

Income smoothing can be employed for both personal and corporate tax. For personal taxes, Deyell says this practice can build shareholder advances for use if funding is required in the future - even RRSPs and other saving plans can be used. For corporate taxes, income smoothing can be used to ensure the small business tax deduction more accurately represents the farm over time. 

Pay more when you can

Matt Bolley, a business advisor and tax specialist with MNP in Brandon, Man., agrees income smoothing is a tried-and-true strategy. He adds it’s not a generally complicated or aggressive method, meaning it can be easily incorporated. 

However, it’s possible to strategically use optional inventory to pay tax in years where doing so isn’t necessary. Bolley says paying more low-rate tax up-front can build a buffer for years when the small business tax rate cannot be accessed. 

Currently, access to the small business tax rate, such as 11 per cent combined federal and provincial tax rate in Saskatchewan, starts to diminish once taxable capital exceeds $10 million. Access is eliminated at $15 million. 

Focus on risk – not tax burden

Clarity is critical, too. Deyell says part of revisiting a tax plan can include risk-reduction strategies such as clarifying matters like shareholder agreements. Doing so helps prevent potential disputes, thereby protecting the business, experts say. The possibility of incorporating holding companies to separate personal and company assets, as well as establishing trusts and corporate beneficiaries, can also be considered.

Part of revisiting a tax plan can include risk-reduction strategies.

“There’s a lot of flexibility to change ownership and change structure, particularly in large operations,” Deyell says.

Whatever the approach, Bolley reiterates farm business owners should not look for quick fixes.

“It’s really a case-by-case basis. If there’s a way of doing it that meets farm needs and gets away from the taxable issue, that’s OK. We can’t make business decisions based purely on tax issues,” he says.

“Every client may have solutions looking at different structures, but we would have to do it for more than just tax reasons.

Bottom line

Updated tax plans are important to proactive business planning, agricultural tax experts say, adding tax tips can be used to help meet goals. Steps like income smoothing and strategic use of optional inventory can help meet long-term tax stability, but each farm and its situation is unique. Business decisions can’t be made based on tax issues, the experts state.

Article by: Matt McIntosh