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Paying Too Much Tax

If you’re a business owner or shareholder that they feel they are paying too much tax, in most cases, you probably are. This isn’t about tax evasion or tax avoidance, this is about taking advantage of opportunities within the tax laws to pay less corporate and personal taxes. This could be part of a tax deferral within your corporation, and depending upon how these proceeds are accessed, can be done on a tax-preferred or even tax-free basis on a personal level.

1. Paying Dividends or Bonuses?

The problem with this, CRA looks at these options virtually the same. Giving a year-end bonus gets taxed at your personal marginal tax rate. In many cases, this is as much as 53.53%. To dividend to a shareholder, if they are deemed an eligible dividend (qualify as a Canadian Controlled Private Corporation) they are paying a virtually identical tax rate as if they took it as a bonus. Bonuses qualify as T4-earned income whereas dividends do not. Dividends paid after a business owner has declared a T4 earned income of $144,500 won’t affect their RRSP amount (2016 RRSP maximum limit of $26,010).

The simple answer to the above question is neither puts you in a tax favourable position!

2. Setting Up an Insured Retirement Plan

Business owners who are looking at a long term strategy in how they can get retained earnings out of their businesses, may want to seriously consider starting up an Insured Retirement Plan (IRP).

The strategy initially involves the purchase of a permanent life insurance policy during your income earning and active years of the business.
Permanent life insurance policies have two components – an insurance coverage (with associated cost) and a discrete tax-sheltered investment/dividend. Funds paid into the policy above the base insurance costs are deposited into the tax sheltered investments of a universal life insurance policy or dividend growth within a participating whole life policy.

Tax Advantage #1 – Tax Sheltered Growth. The goal initially is to minimize the insurance costs (and thus maximizing the deposits into the tax sheltered investments/dividends). Over time the investments/dividends grow on a tax sheltered basis. This is an important part of the strategy, as unlike RRSP’s and TFSA’s, the limit on the amount of deposits you can do is limited by insurance guidelines (basically the size of the policy) rather than income-dependent guidelines. There are specific policy attributes that will be used during policy setup in order to maximize the investment portion and minimize the insurance costs.

Tax Advantage #2 – No Taxes on Withdrawals.  At retirement, we now have a life insurance policy with investments/dividends that have been growing on a tax sheltered basis. Now we want to access these funds for retirement. If we simply withdraw the funds, taxes will be payable. So instead, we use the value of the investments/dividends/cash value of the policy as collateral for a loan (Many/most banks will allow use of these polices as collateral under current conditions). Loans are of course, not taxable. You’ve now managed to access the growth in your investments, without paying taxes on the growth during the accumulation years, or on withdrawals. During the withdrawal years, your loan is recapitalized by the bank, without payments necessarily being made.

Tax Advantage #3 – Loan + Interest Paid Off Tax Free.  Upon your death, the death benefit of the insurance policy consists of the insurance component of the policy + your deposits to the investments/dividends + the tax sheltered growth of the investments/dividends. The total of these are paid out tax free, initially to repay the full outstanding loan balance and any remaining amount to your named beneficiaries. The death benefits under normal conditions are not taxable.

3. Personal Pension Plan or RRSP?

As a business owner or a company shareholder of 10% or more, you can use your company to sponsor your own Personal Pension Plan.

Tax Advantage #1- Deferred Tax Growth. Over 20 years, assuming the same
rate of return on assets as earned in an RRSP, the PPP member will have over $1 million more in registered assets to retire on.

Tax Advantage #2- 7 Additional Tax Savings Types. There are 7 new types of tax deductions inside of a PPP that you cannot find inside of an RRSP:

  1. Greater annual deductions ranging from $440 at age 40 to $15,000 by age 64 and beyond
  2. Terminal Funding to enhance the basic pension
  3. Ability of the corporation to make tax deductible contributions to assist in the purchase of past service.
  4. Special Payments (also tax deductible) if the assets of the pension plan don’t return 7.5%
  5. Interest paid to lenders for contributions made for the PPP are tax deductible
  6. Investment management fees paid on any asset inside of the PPP are tax deductible
  7. Administration, trustee, actuarial fees are tax deductible

Tax Advantage #3- Estate Planning. Assets inside of a PPP can pass from generation to generations without triggering a deemed disposition and because the funds do not end up in the estate, there are no probate fees

Tax Advantage #4- Corporate HST Rebate. Pension Plans can avail themselves of the HST Pension entity Rebate (33% of all HST paid in connection with the pension plan is refunded to the corporation).

Tax Advantage #5- Double Dip in the First Year. Out of the same $100,000 salary, in the year of plan set up, a plan member could make an $18,000 PPP contribution and a $18,000 RRSP contribution if that person had no earned income in the year 1990.

Tax Advantage #6- Purification for Lifetime Capital Gains Exemption Deductions created inside company when purchasing past service, borrowing or doing terminal funding/special payments, can purify a corporation to the exemption ($824,177)**
**2016 limit

4. Health Spending Accounts and Health Welfare Trusts

Business owners that offer and participate within the benefit plan that they provide for their employees or those that don’t offer an employee benefit plan at all can put CRA-approved health and dental expenses through his/her business as a business expense

Tax Advantage #1- Business Expense versus After-Tax Expense? Business owners will typically participate in the same benefit plan as their employees or those who do not have a benefit plan will unknowingly pay for health and dental expenses with after-tax dollars. If either of these scenarios is the case, you are paying expenses that could be a legitimate business expense and are out-of-pocket for the difference. Items like braces, eye glasses or unlimited paramedical expenses, which often have no or limited coverage with benefit plans, can be submitted through a Health Spending Account or a Health & Welfare Trust.

Tax Advantage #2- Coordinating Benefits with a Spouse by Using a Health Spending Account: Technically Health Spending Accounts are not considered a benefit plan thus the Coordination of Benefit rules do not apply. This way you can use your spouse’s plan first and any expenses not covered by your spouse’s plan, the difference can be paid through your Health Spending Account

There are a number of other unique opportunities as business owner to put yourself in a tax favourable position both through your corporation or when you want to access these funds on a personal basis.