Six Tax Tips for the Business Owner

As an entrepreneur or established owner, operating your day-to-day business and planning for the future probably consumes most of your work time. So, paying less tax, although important, may not always be top of mind, as painful (and frankly annoying) as it can be.?

You see, there’s literally no time like the present to make sure you’re taking full advantage of all the tax minimization strategies available to you. So, as you read to these six key tips, consider how you may be able to apply one or more to you and your business.

If you are an entrepreneur or a business owner in Canada, you need to know these six key tips that may help you pay less taxes and keep more of your hard earned business income.?

EMPLOY YOUR SPOUSE AND CHILDREN

Whether you carry on your business personally or through a corporation, you should consider paying a salary to your spouse and/or children. Canada’s progressive tax system, which assesses higher income earners at higher tax rates, provides an incentive to split income with family members in a lower tax bracket.?

Paying a salary to a spouse and/or child who pays tax at a lower rate than you can create net tax savings. However, you need to make sure that the salary is reasonable for the services they perform for the business.?

Paying a salary to a family member, incorporating, and investing excess cash are all great tax minimization strategies

INCORPORATE YOUR BUSINESS

If your business produces more profit than you need to satisfy your personal cash flow needs, then incorporation could produce a sizeable tax deferral by accessing the lower small business tax rate for active income.?

This deferral benefit, however, is only available if the profits are left in the company. The longer the profits are left in the company, the larger the tax deferral.

Note that investment income earned on prior deferrals and rental income do not receive this lower rate.?

Now, the tax deferral achieved through incorporation can create a permanent tax saving if the shares of the business are eventually sold and are eligible for the lifetime capital gains exemption. However, if you are incurring losses, incorporation may not be the best option as losses would be trapped in the corporation and not available for personal use.?

Other potential financial advantages of incorporation include:

1. having family members own shares to have access to multiple capital gains exemptions
2. paying out dividends to actively participating family members who are taxed at a lower rate.

I work with business owners to help decide which strategies work with their situation, because it can literally be a million dollar decision.

INVEST EXCESS CASH

Since personal tax deferral is accomplished by leaving profits in the company, the question then becomes what to do with those profits. If paying down debt or reinvesting in the business operations are not options, then a smart investment plan is your best alternative. This strategy is most effective for active business income subject to the small business deduction. I help business owners build the right investment portfolio for their business.

There are several ways to save on taxes – make sure you review them all with a financial planner and choose which are best suited for your business.

PLAN FOR YOUR RETIREMENT

In order to make the maximum allowable registered retirement savings plan (RRSP) contribution next year, you’ll need to create the contribution room this year by maximizing reported earned income. If incorporated, you will want to review the best dividend/salary mix for your situation.

As part of your overall plan, you may also want to make a contribution to your tax-free savings account (TFSA).?Also, don’t forget to think about RRSP contribution room when setting and reporting remuneration for services provided by family members who also work in the business.?

What I do is give business owners clarity in balancing their personal and corporate investments by taking into account all the variables and how it will fit with this year’s maximum contribution limits for business owners.

And here’s a golden piece of advice I’m finding that few high net worth professionals are aware of. If your corporation has a passive income of over $50,000 or active business income over the small business limit, you should explore the use of an individual pension plan (IPP). An IPP is ideally suited to business owners in their mid-forties or older who have a past history of earning employment income from their company in excess of $100,000 per year.?

The way an IPP works is it allows you to shelter even more earnings from tax than your RRSP while still offering some protection from creditors.

PREPARE FOR THE SALE OF YOUR BUSINESS

It’s never too early to plan your business exit strategy. In fact, the groundwork should be in your Founder’s Agreement if it is a joint venture.?

If you’re planning on selling all or part of your business at some point, confirm with your accountant whether you’re eligible for the lifetime capital gain exemption and what steps need to be taken. We’re talking at least several hundred thousands of dollars in savings if you do it right.

MAKE USE OF R&D EXPENSES

I find this is often overlooked, but expenses related to research and development activities incurred to develop and enhance your products and production processes may qualify for valuable tax incentives in the form of refundable and non-refundable tax credits.?

While the guidelines governing program eligibility can be complicated, a wealth of information is available at the Canada Revenue Agency to help you assess your eligibility for the program, and I coordinate specialists who has the precise niche specialty and expertise you need to have piece of mind.

WHAT DO YOU DO NEXT?

At the end of the day, though, unfortunately, even the best financial planner can’t eliminate all your taxes. But, if you’re transparent about your business and personal goals, and understand the value of professional advice, together you can implement wise, strategic practices to minimize or defer income taxes that would otherwise be payable.

Of course, these are only a few of the tax-planning opportunities available to you as a business owner.?

If you want to have a comprehensive tax check-up to help identify all the tax planning strategies and tactics available to you that will reap rewards in years to come, what we can do is this. I’ll look at your goals, your concerns, what you’re doing now, and we can see if you’re a good fit for a private wealth planning experience.

Send me a message or write me a note at [email protected] and I’ll give you next steps based on your personal goals and concerns.

Thank you very much,

David J. Sigrist, making planning simple