It’s that time of year when, like Christmas, ‘giving’ has implications to the pocketbook. Yes, the taxman cometh. And if you own your own business, the taxman has the habit of dropping by twice: once to see how your business is doing and once again to see how you are doing.
To help you make the most of the taxman’s visit, here are 12 tax-planning strategies for the owner manager that has their own incorporated business. Due to the complexity of tax laws and that every corporation and owner manager has different facts and circumstances, it is important to consult with qualified tax and/or legal advisors before taking any action on the strategies below.
- Consider employing lower income family members and pay them a salary that is reasonable based on the services they are performing. The salary will create RSP contribution room and generate CPP/QPP pensionable earnings.
- Consider paying dividends from corporate earnings to spouses and adult children shareholders. Canadian dividends are taxed lower than salary. However dividends will not create RSP contribution room or CPP/QPP pensionable earnings. Dividends paid out to benefit related minor children are taxed at the highest marginal tax rate under the “kiddie tax” rules.
- Consider an estate freeze so that the capital gain on the future growth of the business is deferred and attributed to the next generation but the control of the business can remain with the parents.
- In certain circumstances, consider setting up an RCA or IPP to increase the retirement savings of the owner-manager and lower the tax burden of the corporation.
- Consider corporate owned life insurance for funding buy-sell agreements, funding tax liabilities, key person protection, etc.
- Use corporate funds to make the RSP contribution for the owner-manager. The cash used to make the RSP contribution will be considered employment income (reported on the T4 and thus will create future RSP contribution room) but the offsetting RSP deduction will avoid taxation on the increased salary.
- If possible, pay bonuses to employees to reduce the company’s taxable income to $300,000 since the first $300,000 of small business active income (2005 value) is taxed at low tax rates (17% – 22%).
- Consider deferring employee bonuses up to 179 days after the corporate year-end. The company will get a tax deduction in the current corporate tax year but does not have to pay the bonus in the current year. The employee though will declare the bonus in the year of receipt, which in certain cases may lower the tax liability for the employee on the bonus. However withholding tax will continue to apply on the bonus.
- Ensure a legally binding shareholder’s agreement is in place. Among other things a shareholder agreement can help to ensure an orderly manner for settling shareholder disputes; can set restrictions on selling shares to third parties; can provide a framework for the purchase of the shares of a deceased shareholder; competition clauses, etc.
- Determine what the Paid-Up Capital (PUC) is on the shares. If the PUC is not nominal, an amount per share up to the PUC may be paid out to the shareholder tax-free in a complex series of transactions. This can assist shareholders requiring cash in a tax-effective manner. However, this tax-free pay out will reduce the ACB and PUC of the shares going forward.
- To minimize net corporate tax due to “integration”, consider paying out dividends to the shareholders in the same year that passive investment income is earned in the corporation (however before doing this consider other issues such as creditor protection, U.S. Estate Tax, etc).
- Ensure that the corporation qualifies for the $500,000 qualified small business exemption prior to a disposition of operating company shares. If not, certain transactions may need to take place prior to disposition in order to “purify” the shares for purposes of the qualified small business exemption.
TAX PLANNING CALENDAR
JANUARY
- 15th – Deadline for an employee to inform their employer of any deferred stock options benefits related to a stock option exercise from previous year.
- 30th – Deadline to pay interest for previous year on a family loan at prescribed interest rates.
- Consider making maximum lump-sum RSP contribution for current year.
- Consider making $2,000 lifetime over-contribution to your RSP.
- Review your personal financial plan, including your estate plan to ensure it is still appropriate.
FEBRUARY
- 28th – Deadline for employers to send in T-4 summary to the Canada Customs and Revenue Agency (CCRA). In addition, a copy of the T-4 slip must be delivered or mailed to the employee by February 28th.
MARCH
- 1st – RSP contribution deadline. If it’s a leap year, the deadline is February 29. This deadline applies for regular RSP contributions, retiring allowance RSP contributions, or Home Buyers’ Plan or Lifelong Learning Plan RSP repayments.
- 1st – Labour-Sponsored Fund contribution deadline. If it’s a leap year, the deadline is February 29.
- 15th – 1st quarterly Canadian tax installment is due.
- 31st – Inter-vivos/Living Trust tax return deadline. If it is a leap year, the deadline is March 30th.
- If you are expecting a tax refund, consider filing your personal tax return early—but only after you have received all your necessary tax information.
APRIL
- 15th – U.S. resident tax return or four-month extension request deadline. Deadline for extension request for non-resident aliens who are subject to withholding tax. Deadline for the balance owing to avoid interest charges.
- 30th – Deadline to file your Canadian personal tax return and pay any balance owing, to avoid paying interest and a late filing penalty.
