What Contractors Should Consider Approaching Tax Season
Author: Andrew Cartwright
Tax season can be an especially busy time of year for contractors. Right as winter begins to thaw contractors are ramping up for bidding season. At the same time, they are closing out reporting from the previous year, considering tax planning and finalizing financial statements. In the rush to get things done, contractors can often forget the value of thinking strategically and planning for the year ahead. These decisions will not affect your business’ ability to grow but can also affect your construction bond facility. Below are some tips for contractors to keep in mind.
At this time of year, a measure of balance needs to be found between withdrawing profits, building the company’s balance sheet and planning appropriately to minimize taxes. Excess profits can be removed via management salaries and bonuses, repayment of shareholder loans or the issuance of dividends. Each has their own tax implications and should be considered as part of the owner(s)’ overall tax planning strategy. In addition, the balance also needs to be struck between removing capital from the company and retaining enough to meet its cash flow requirements for the upcoming year.
Consult with your partners including your accountant and surety broker and match your plans for growth with the capital you need in the business. Your bond company will always want to see as much retained profits as feasible to ensure they can continue to support your continued growth. The worst thing that can happen is you complete a year-end tax planning exercise, remove too much capital and then realize that there isn’t enough left in the company to fund growth or take advantage of market opportunities. This could lead to a performance bond on a great opportunity being declined by your surety company. That said, low interest rates are creating unique financing and leveraging opportunities so be sure to discuss with your lenders and financial advisors.
This is also the time of year to ensure that as an owner you don’t have too much at risk. This can include removing capital to a holding company or family trust, negotiating guarantees with the bank and reviewing the indemnities in place with a surety. Part of the annual review and tax planning process should include an examination with your stakeholders of where you are exposed. Reducing exposure for you and your business and credit proofing appropriately is key for any successful business owner.
Mike Mastroluisi at Pettinelli Mastroluisi LLP, Chartered Professional Accountants, reminds owners that “While credit proofing is important to any growing or established company it is important to discuss with your accountant and other financial partners as it can result in additional reporting and tax considerations. The use of a holding company to create separation between the owner and the company is a popular strategy but there are additional considerations including management/owner renumeration strategies, potential need for consolidated financial statements, exit strategies and succession planning and the related tax consequences amongst others.”
Wage Subsidy Program
2020 was an especially strange year. Many contractors took advantage of the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Business Account Interest Free Loans (CEBA).
Canada Emergency Wage Subsidy
CEWS was a program that allowed Canadian employers who had seen a drop in revenue during the COVID-19 pandemic to avail of a wage subsidy to cover part of their employees’ wages retroactive to March 15th, 2020. The amount a firm can secure is based on the amount the company’s revenue has dropped year over year. The maximum a firm can secure is 75% of an employees’ wages (40% base rate plus 35% top-up).
This is based on a revenue drop of 70% or more, though the subsidy is still available at reduced levels for lower declines in revenue. Ensuring that you review these calculations with your accountant will be very important. This will ensure that you are taking advantage of the subsidy fully or if you have taken any excess that you identify that and make a repayment before the balance starts accruing interest and penalties.
Canada Emergency Business Account Interest Free Loans
The CEBA program was created to provide eligible businesses with $40,000 in interest free loans. This has subsequently been expanded to $60,000 with previous applicants being able to apply for the additional $20,000. Applicants have until March 31st, 2021 to apply for the $60,000 loan or the $20,000 expansion. It should be noted that repaying the balance of the loan on or before December 31st, 2022 will result in loan forgiveness of 33% of the loan up to $20,000. If not repaid by December 31, 2022, the loan will be converted to a 5% term loan with full repayment due by December 31, 2025.
In general, making sure you are planning ahead, discussing these programs with your accountant and lawyer and ensuring you are following eligibility requirements and taking advantage of the programs where you can, will help ensure your business has the support it needs until the pandemic is in the rear-view mirror.
With tax season approaching now is the perfect time to make sure you are having conversations with your accountant, lawyer and surety broker to ensure that you are putting you, your company and its finances in the best possible position to maximize growth, reduce risk and ensure your construction surety bond facility is not negatively impacted.