Taking a Byte Out of Taxes, by SB Partners
www.sbpartners.ca
At: Silicon Halton Workshop Day at the @BurlingtonHive >> http://ow.ly/uhRdf
Presented: March 26, 2014
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3. 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 i
Greg Clarke, CPA, CA
Partner
practical solutions to their
challenges and a realistic
t f ll il bl
905‐633‐6323
assessment of all available
opportunities.
905 633 6323
gclarke@sbpartners.ca
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4. 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
5. 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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6. 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 Savings
Avoid the payment of tax by taking proper steps in
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accordance with the rules of the Income Tax Act.
9. 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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11. How Much 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
12. 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???
13. When to Incorporate?When to Incorporate?
Generally when the business income is exceedingGenerally when the business income is exceeding
your personal needs
Remember 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 year
As 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
14. 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
funds
After‐tax funds in corporation is 84.5% vs. p
personal 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
15. 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 $185,000
N d h h h lif f h• Need to ensure that the shares qualify for the
exemption
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17. 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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18. 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
What can we do???
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20. 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
21. 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 income
A 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
27. Tax DeductionsTax Deductions
Home 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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28. 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
• Ensure you track your meals & entertainment
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• Ensure you track your meals & entertainment
appropriately
29. 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 funds
A i f d h d h li
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• At time of death, proceeds on the policy are
paid to the corporation
30. 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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31. 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