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You can Pay More Taxes…..But Why Would You?
By running a successful and profitable business, you need to be prepared to ultimately write a considerable cheque to your silent partner, Canada Revenue Agency in the form of your corporate taxes, personal taxes and/or dividend payouts. If you leave retained earnings in your business and it earns passive income (investments not integral to the running of the business), gains are taxed at the highest corporate tax rate regardless of your company’s size. The federal government has your number and they will eventually get their pound of flesh. But does it need to be this way?
Tax Deferral is not Tax Avoidance
As a business owner, you have the ability to undertake certain strategies that will either reduce your tax obligations or defer it to a later date. But why aren’t all business owners taking advantage of this opportunities? In many cases, your Accounting professional may not be familiar with many of these opportunities. There are both opportunities from a balance sheet and income statement perspective.
Income Statement Opportunities
I have many clients that come to me and say they are having a great year and they’d like to pay less corporate tax, short of to bonus out to themselves. Providing that the business owner has been paid a salary (versus a dividend), they may have a great opportunity to set up their own Personal Pension Plan (PPP) that is funded and guaranteed by the business. The same can be done with any shareholder owning at least 10% of the shares of the business. They can claim past service and gain even more contribution room. Also, any unused RRSP-eligible room can also be put into a PPP. A great opportunity to defer a lot of potential taxes and further credit protect themselves.
Employee Benefit Plans
Many business owners I work with have an employee benefit plan but many are on the same plan as their employees. They are subject to the same deductibles, co-pays and benefit exclusions as their employees and pay a considerable amount of legitimate health and dental expenses in after-tax dollars. By setting up a Health Spending Account to augment their benefit plan, they wouldn’t need to be out of pocket.
Balance Sheet Opportunities
Some clients have a tremendous amount of retained earnings held in their business and would like to access these funds in as tax-effective a manner as possible. Typically, these business owners would dividend monies to themselves to facilitate this transaction. By doing this they are still paying approximately the same marginal tax rate as they would if they were “bonusing down” to themselves on a year-to-year basis. Alternatively, by setting up an Insured Retirement Plan (IRP) held by the corporation (preferably a Holding Company), the assets within the policy grow tax-free and depending upon how you access these funds, the proceeds can be accessed in a very tax-favourable manner.
There are a number of other tax deferral opportunities to leverage. Provided you’re an incorporated business, making profit and paying too much tax as a consequence, you may want to investigate some of these opportunities.
We are not Accountants but work in conjunction with your Accounting professionals to ensure that a proper and agreed upon course of action is taken.