Tax planning for business or for individuals and families is an ongoing process to reduce the overall taxes owing by the business and ultimately by the owners and family. When setting up and running a business, a team consisting of a professional accountant and Canadian tax and business lawyers is paramount as an effective tax reduction strategy. Tax law is constantly changing and our Toronto tax firm will ensure that you are up to date on income tax rules and regulations affecting your small business and corporation. We provide expert Canadian income tax advice and assistance with:
- Structuring business start ups
- Incorporations and shareholders agreements
- Identifying tax planning opportunities for your business and corporation to minimize income taxes
- Small business tax advice and medium business tax advice for the owner manager
- Partnership taxation and minimization
- Joint venture taxation
- Unfiled taxes including Corporate back taxes and personal back taxes
- Advising on the tax implications of proposed transactions including franchise tax planning
- Real estate tax planning including joint ventures
- Tax shelter and charity tax scheme disputes
- International tax planning and offshore tax disputes
- Scientific Research and Experimental Development (SR&ED) Tax Incentive Program
- Cross-border tax issues including transfer pricing tax issues
- GST/HST, excise taxes, customs duties, capital taxes, property transfer taxes, income tax, capital gains tax
- Taxation of executives and employee compensation including Independent contractor agreements
- Private Pension plans
- RRSP meltdowns
TAX PLANNING–INCOME SPLITTING
A Canadian taxpayer’s income tax bracket and therefore the income tax liability depends on the absolute amount of the taxpayer’s income because the higher theincome the higher the income tax bracket and the percentage of income tax paid. Income splitting is a tax planning strategy whereby one taxpayer transfers a portion of his/her own income to another taxpayer who is taxed at a lower tax rate. There are various income splitting techniques that can be used.
INCOME SPLITTING TAX PLANNING-SALARIES
A small business owner can often income split with a spouse by employing the spouse in the business as a T4 employee or by having the spouse own shares of the corporation and receive dividends. Any salary paid must be reasonable and supported by the actual work done. A written employment agreement is very advisable. If the spouse or children are going to own shares of the business, care must be taken to avoid the income tax attribution rules that attribute income or capital gains on the property back to the spouse who originally owned the assets.
Maximize CCA (Tax Depreciation) - Buy Capital Assets Just Before Business Year End
If you purchase business capital assets immediately before your business year end, you can claim capital cost allowance (income tax depreciation) of 50% of the capital cost allowance rate in that year. If you buy the asset just after the year end then you claim that same rate, but only in the next year, postponing your income tax deduction by one year.
Sell Business Capital Assets After Business Year End
By disposing of capital assets (business property) after the business taxation year end you defers income taxes on the capital gain and depreciation recapture until the next year end.
Consider Income Tax Effects Of Dividends Vs. Salary/Bonus
Owners of a business should consider using a mix of salary or bonus and dividends to minimize overall taxes for the individual shareholder – owner and the corporation. This should be done every year and requires income tax planning and calculations done by the corporation’s accountant.
Consider Setting up a Private Pension Plan
Contributions to employees’ registered pension plans, including plans for the shareholders, are tax deductible to the company as business expenses. The employer’s pension contributions to the RPP are not taxable for the employees. Private pension plans can be set up for owners and managers instead of a Registered Retirement Savings Plan and are an effective tax planning tool.
Repay Shareholder Loans Within 2 Corporate Year Ends
Shareholders and owners can always take funds from the business as shareholder loans or draws, but there are tax implications and rules that have to be followed. If the shareholder loan amount is repaid within two business year ends (ie. by the end of the following business year), the amount of the loan is not deemed to be a taxable benefit to the shareholder/owner (borrower). If it is outstanding for 2 corporate year ends then subsection 15(2) of the Income Tax Act includes the full amount in the income of the shareholder. However, if the shareholder did not pay interest on the loan, or paid interest 30 or more days after the end of the taxation year, then the shareholder is deemed to have received a taxable benefit for the unpaid interest.
I already hired a CPA, do I still need a tax lawyer for corporate tax planning?
CPAs and tax lawyers offer services that can help you in your hour of need. Your accountant can handle your daily activities. But, a tax lawyer may need to step in to handle things that are too complex for your CPA. Tax lawyers are specialized in navigating complicated legal and technical issues.
So, it always wise to have one on retainer. That way, you can consult them in advance to avoid any problems before they complicate your tax situation.
What is the lifetime capital gains exemption?
The LCGE is an exemption that allows small business owners to avoid paying capital gains tax. This could be from selling property or shares in the business for up to a certain amount. Farms and fishing properties also fall under this classification.
Cooperates typically have to pay half of the revenues realized from such sales. But, LCGE allows such businesses to deduct the tax from the profits.
How can passive income investment reduce taxes?
Tax laws around passive income changed in 2018. Now private Canadian corporations are free to apply SBD (small business deduction) to the area of active business income. Such a deduction means they can pay the same rates as small businesses.
Your passive income, therefore, reduces the amount of tax paid on active income. You can pay zero returns for up to $500k of your active income. Every $1 realized from a passive income of over $50k reduces the active income tax by $5.