Workshop DayMarch 26 2014March 26, 2014

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Out of TaxesOut of Taxes

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By Greg Clarke, CPA, CA, Partner

March 26, 2014

My role as a professional is to i li ll h igive my clients all the options and information they need to 

k i f d d i i It’

Greg Clarke, CPA, CA

make informed decisions. It’s important for them to have 

ti l l ti t th iGreg Clarke, CPA, CAPartner practical solutions to their 

challenges and a realistic t f ll il bl905‐633‐6323 assessment of all available 

opportunities.

905 633 6323gclarke@sbpartners.ca@GregClarkeCA

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Agenda

• What is Tax Planning?What is Tax Planning?• Business Structure• Capital Gain Exemption and Corporate StructuringCapital Gain Exemption and Corporate Structuring• Salary vs. Dividends• Tax Deductions• Tax Deductions• Meals & Entertainment• Life Insurance

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• Life Insurance• Sales to US Customers

Tax Planning = Tax Efficiency

• Ensuring that you don’t pay more tax than youEnsuring that you don t pay more tax than you have to will have a direct impact on the wealth that you retainwealth that you retain

• Tax planning is not a “one plan fits all approach” but is specific to the individualapproach  but is specific to the individual circumstances of the business and the owner

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Tax Planning = Tax Efficiency

Two Methods of Approach:1 f l1. Tax Deferral Defer the payment of tax to a point in the future and earn a rate of return on the unpaid taxes. The longer the deferral, the better!2. Tax SavingsAvoid the payment of tax by taking proper steps in 

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accordance with the rules of the Income Tax Act.

Your Business StructureYour Business Structure

h / hProprietorship / Partnership– Income/loss is reported on your personal tax return and taxed at your marginal tax rate

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Your Business Structure

Corporation• Income/loss is reported on a corporate tax return and not on your personal tax  return

• The only income you report is the income that you earn from the corporation (i.e. salary/dividend)

Reasons for Incorporating:

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• Risk Management• Deferral of Taxes

Incorporation – The Tax Deferral!Incorporation – The Tax Deferral!

Corporations are taxed at lower rates than individuals thereby creating the ability to deferindividuals thereby creating the ability to defer some income taxes until a later point when you need the incomeneed the income.

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Incorporation – The Tax Deferral!

This can create a significant opportunity since more after‐tax dollars will be retained in a corporation which results in:which results in:

• Higher positive cash flow to fund operations

• Potentially less need for credit due to cash flow

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• More after‐tax dollars available for investments

HowMuch is the Difference?How Much is the Difference?

$11 138 $43 953 $83 237 $136 270$11,138 -$43,953

$43,953 -$83,237

$83,237 -$136,270

$136,270-514,090

Personal Tax Rate 24 15% 32 98% 43 41% 46 41%Rate 24.15% 32.98% 43.41% 46.41%

Corporate Tax Rate (1) 15.50% 15.50% 15.50% 15.50%

Deferral 8.65% 17.48% 27.91% 30.91%

Deferral Per

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$1,000 $86.50 $174.80 $279.10 $309.10

(1) Corporate tax rate used is for taxable income up to $500 000taxable income up to $500,000

Once a Proprietor Always aOnce a Proprietor, Always a Proprietor

Not the case at all!If you’re operating as a proprietor/partnership, you can roll your existing business into a corporation once you’re ready. This may require some special tax elections to avoid triggering unintended tax on the transfer to the 

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corporation.But when is that???

When to Incorporate?When to Incorporate?

Generally when the business income is exceedingGenerally when the business income is exceeding your personal needsRemember there is a cost to incorporation andRemember – there is a cost to incorporation  and annual maintenance costs to be incurred of approximately $3 000 per yearapproximately $3,000 per yearAs a result, you need to be earning approximately $20 000 or more than your personal needs to

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$20,000 or more than your personal needs to offset the annual compliance cost of the corporationcorporation

Small Business Deduction

Retaining funds in the business allows you toRetaining funds in the business allows you to earn a rate of return on a higher principal balance than if you bonus or dividend out the fundsAfter‐tax funds in corporation is 84.5% vs. ppersonal of 53.5% ‐ difference of 31%Any investment income is taxed at 48% in the

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Any investment income is taxed at 48% in the corporation

Capital Gain Exemption on Small Business Shares

• This is an important tax break for businessThis is an important tax break for business owners

• Allows for each shareholder to realize a gain• Allows for each shareholder to realize a gain up to $800,000 tax free = savings of $185,000N d h h h lif f h• Need to ensure that the shares qualify for the exemption

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Capital Gain Exemption on Small Business Shares

Rules:• Shares must be of a Canadian Controlled Private Small Business Corporation 

• At time of disposition 90% of the• At time of disposition, 90% of the corporation’s assets are directly used in active business carried on in Canada

• Shares were held for more than 24 months preceding disposition with 50% of the assets 

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used in active business during that period

Capital Gain Exemption on Small Business Shares

• Need to ensure that the company does not• Need to ensure that the company does not have significant excess assets such as excessive cash or investments held in it

• Excess capital and investments are at risk from• Excess capital and investments are at risk from creditors

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Problem??

• Company retains profits and invests within theCompany retains profits and invests within the corporation. Eventually the company won’t meet the tests for the capital gain exemptionmeet the tests for the capital gain exemption as investment assets build up

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Holding Company

Shareholder

Pay a dividend up to the Holding Company and invest the assets in the holding company

Holdco

Dividend Still have a problem since the holding company doesn’t get a 

l

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capital gain exemptionOperating Company

What to Do?

• Use a Family Trust to own the operatingUse a Family Trust to own the operating company and have the holding company as a beneficiary of the Family Trustbeneficiary of the Family Trust

• Allows you to pay a dividend up to the holding company on a tax free basis for investmentcompany on a tax‐free basis for investment

• If the company is sold, the gain would occur at h F il T l l

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the Family Trust level

Family Trust Structure

• The beneficiaries of the Trust include familyThe beneficiaries of the Trust include family members

• Beneficiaries over the age of 18 can receive a• Beneficiaries over the age of 18 can receive a dividend to split incomeA i h f i• Assuming no other sources of income, a dividend of $49,000 would be essentially tax‐f

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free

Additional Benefit ‐ Family Trust Structure

• Provides ability to multiply the capital gain exemption over several beneficiaries A typicalexemption over several beneficiaries. A typical family of four results in an overall capital gain exemption of $3 200 000exemption of $3,200,000

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Family Trust Structure

BeneficiariesTrustee

Corporate Family Trust

Dividend

Beneficiary

Dividend

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Operating Company

Salary vs. Dividends

SalarySalary• Results in a tax deduction to the companyS d d ti ithh ld t• Source deductions withheld on payments

• More administration involved• Qualifies to build up RRSP room

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Salary vs. Dividends (cont’d)

DividendsDividends• Not a tax deduction to the corporation

• No source deductions withheld on payments

• Does not qualify to build up RRSP room

• More expensive than salary since the corporation pays tax first and then the shareholder again

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pays tax first and then the shareholder again (approx 2‐3% higher than salary in total)

Tax DeductionsTax DeductionsVehicleThree options available:• Deduct the business use portion of your vehicle 

expenses on your personal tax return.• The company can reimburse you for business useThe company can reimburse you for business use 

of the vehicle via i) a per kilometer rate or ii) thl ll ( t h t f lii) a monthly allowance (watch out for personal 

tax issues!)• The company can own or lease the vehicle but 

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p ythis is a taxable benefit to you for the personal use portion of the vehicle expenses.

Tax DeductionsTax DeductionsHome Office• Write off the business portion of your home• Write off the business portion of your home 

expenses against your business income.• Can’t do this if you have a permanent office• Can t do this if you have a permanent office 

space outside of the house.Golf DuesGolf Dues• Not deductible

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Meals & Entertainment

• Costs incurred for meals & entertainment areCosts incurred for meals & entertainment are only 50% deductible for income tax purposes

• Only receive 50% for input tax credit for HSTOnly receive 50% for input tax credit for HST purposes

• Meals & entertainment for group functions (eg• Meals & entertainment for group functions (eg. Christmas party) are fully deductible

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• Ensure you track your meals & entertainment appropriately

Life Insurance

• Consider holding life insurance as a corporateConsider holding life insurance as a corporate policy with the corporation

• Life insurance payments are not tax deductible• Life insurance payments are not tax deductible but payments would be funded with after‐tax corporate dollars that have a greatercorporate dollars that have a greater purchasing power than personal fundsA i f d h d h li

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• At time of death, proceeds on the policy are paid to the corporation

Life Insurance

• The insurance proceeds can be paid out as aThe insurance proceeds can be paid out as a capital dividend to the Estate of the shareholder on a tax free basis if the propershareholder on a tax free basis if the proper election is filed with CRA in advance of the paymentpayment

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Sales to U.S. Customers

• If you earn income from sales to the U S youIf you earn income from sales to the U.S., you should file a U.S. corporate tax return

• If you don’t have a physical presence in the• If you don t have a physical presence in the U.S., then it will likely qualify under the U.S.‐Canada Tax Treaty and no taxes applyCanada Tax Treaty and no taxes apply

• Protective filing

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• Don’t charge HST to customer outside Canada

Questions?

Greg Clarke(905) 633‐6323(905) 633 6323

gclarke@sbpartners.ca@G Cl k CA@GregClarkeCA

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