The top 5 ways for Canadian business owners to keep more of the money they earned.

1. Top 5 Strategies to Keep your
Profit in your Pocket
At Tax Time and All Year Long
Presented by:
Tim Miron, C.A

2. Overview
1) Effective Tax Planning
2) Income splitting options
3) Hybrid Expenses
4) Sales Tax Savings
5) Avoiding voluntary taxes

3. Legend / Assumptions
CRA = Currency raking associates or Canada Revenue
Agency.
All examples assume we use the top tax rates:
15% corporate income tax
46% salary tax rate
This information is for discussion purposes. Please speak to a tax professional for your
specific planning.

4. 1) Effective Tax Planning
• Incorporation
• Holding companies
• Retirement (Holding company vs RRSP)
• Life insurance
• SRED Credits and wages

5. Incorporation
Assumptions:
Extra income $20,000
Unincorporated Income ofTax
46% Income $120,000 living off of $100,000.
$9,200
Net after tax cash $10,800

6. Incorporation
Income earned in a corporation. Owner paid $100,000 salary.
Corporate income $20,000
Additional Costs $2,000
Net income $18,000
15% Income Tax $2,800
Net after tax cash $15,200
34% Tax on Dividends $5,200
After Tax Cash $10,000

7. Incorporation
Unincorporated after-tax cash $10,800
Tax savings on incorporation:
Incorporated after-tax cash $10,000
Tax savings $-800
This example assumes two things:
1) All the income is earned at the top tax rates
2) The income is all taken out in the same year

8. Incorporation
A corporation is effective in tax planning if:
The income is taken at lower tax rates.
The income is not taken out each year (more earnings
retained for investment)

9. Compounding effect of incorporation
Unincorporated Incorporated
After Tax Cash $10,800 After Tax Cash $15,200
Invested for 20 years Invested for 20 years
Rate of return 5% Rate of return 5%
(before taxes) (before corp taxes)
Value $289,100 Value $484,300
Annual draw $30,000 Annual draw $30,000
Years to draw 9.5 Years to draw 16

10. Holding Companies
Dividends between related companies can be paid tax free.
A holding company is a corporation in place to hold the shares
and / or non-operating assets of a corporate group.
In a business with multiple families involved, family holding
companies can be put in place to allow for a saver and a
spender.
Capital gains exemptions can be compromised with Hold Co's.

11. Retirement - RRSP vs Corporation
RRSP's provide for a deduction in income equal to the
contribution made.
When the income comes out it is taxed at the marginal rates.
$20,000 could be at a rate of 35% = $7,000 in tax in retirement.
RRSP's are limited to 18% of earned income or $21,000 / year

12. Retirement - RRSP vs Corporation
Retained earnings in the company can build up over time.
Retained earnings are already taxed at the corporate rate.
If no other income $35,000 / year can be paid for virtually no
personal income tax.
Retained Earnings are not limited.

13. Incorporation vs RRSP
Unincorporated Incorporated
Cash $20,000 After Tax Cash $15,200
Invested for 20 years Invested for 20 years
Rate of return 5% Rate of return 5%
(no taxes) (before corporate taxes)
Value $694,385 Value $484,300
Taxes on withdrawal 35%
After Tax Cash $451,000
Annual draw $30,000 Annual draw $30,000
Years to draw 15 Years to draw 16

14. Incorporation vs RRSP
Pros and Cons
• Dividends can be split between any shareholders
• RRSP's have contribution limits where retained earnings
do not.
• RRSP's have required withdrawals (RIF)
• RRSP income is all taxed at the same rate as interest
(the high rate)

15. Life Insurance
Uses for life insurance:
• Catastrophic event protection
• Estate Planning
• Expedited savings

16. Life Insurance - Protection
In a business with 2 or more families involved, life insurance
can be used to protect the families of the shareholders.
If the life insurance premiums are deducted on the tax return
the proceeds flow-into the company tax free.
A capital dividend account then allows for a tax-free payment
out of the company to buy-out the estate of the former partner.

17. Life Insurance - Estate Planning
Life insurance can be used:
• To pay the realized gains on death
• Equalization between children in / out of the business
o One child could inherit the business
o The other child could inherit the life insurance policy

18. Life Insurance - Estate Planning
You could also purchase an insurance policy and list me as the
beneficiary!
I'm worth it I promise!

19. Life Insurance - Expedited savings
In certain life insurance arrangements (Universal / Whole Life)
a company can contribute investment dollars to an insurance
policy.
The contributions would grow inside the insurance policy tax
free (increasing the compounding).
The Cash Surrender value of the policy can either be
withdrawn (some tax consequences) or borrowed against, to be
paid off when the policy pays out.
Do NOT sign up for this without speaking to your accountant!

20. SRED Credits
Scientific Research and Experimental Development credits are
available on a wide variety of development projects.
A credit is received for costs incurred to perform SRED work.
One cost is wages of specific employees. The max is 5 times
the CPP max ($48,000). However bonuses are not included in
these wages.

21. 2) Income Splitting
• Reduce taxes
• Family Trusts
• Multiplying tax savings

22. Income Splitting - Reducing Taxes
Income splitting only works if you have
someone to split the income with.

23. Income Splitting - Reducing Taxes
Ideally - Income between spouses is the same
In a corporation only three ways for an individual to be paid:
• Salary
• Dividends
• Interest / Rent

24. Income Splitting - Salary
CRA requires that salaries paid to related individuals must be a
fair wage for services performed.
• Have a job description
• Have other staff know who your spouse is
• Have your spouse know where the office is
• Pay them on the regular payroll (not a one time bonus)
• Pay them as an employee not a sub-contractor

25. Income Splitting - Dividends
Dividends are paid to a class of shares of the company out of
after tax earnings.
• Set up different classes of shares allowing discretionary
dividends
• Do not pay dividends to individuals under 18
• Shares do not have to be voting
• Shares either have a fixed value (cap on dividends) or grow
with the value of the company

26. Income Splitting - Property
A company can pay rent / interest to an individual
• Rent between related parties must be at fair value
• Interest must be at market rates and on an amount loaned
to the company

27. Income Splitting - Family Trusts
If you can't trust family who can you trust?

28. Income Splitting - Family Trusts
Shares of a company can be owned by another corporation, an
individual or a family trust.
A family trust is a legal entity that can hold capital items and
receive income. The income must either be paid out to
individuals and taxed personally or the tax is paid by the trust.
The trust can be set up to discretionally pay income out (not
consistent basis).
At the end of an inter-vivos trust's life (21yrs) the capital must
be paid out.

29. Income Splitting - Family Trusts
Example:
• A family trust could be created to hold a class of shares of
the company.
• The beneficiaries could include you and your children
• The corporation could pay dividends to the trust
• The trust could then allocate those dividends to a child in
university.
• $30,000 after tax is $35,300 in income
• $30,000 personally would require $55,500 in personal
income.

30. Income Splitting - Multiply Tax Savings
Multiple small business deductions
• Set up two separate corporations earning active income,
one owned by two separate people.
• This would create 2 small business deductions
• Association rules would have to be carefully considered
• Up to date and on-going sets of books would have to be
maintained.

31. Income Splitting - Multiply Tax Savings
Capital Gains Exemption (CGE):
• Every Canadian is entitled to one life time capital gains
exemption of $750,000 on the sale of a business or shares
in a business
• Having multiple common share holders could allow for this
exemption to be used by more individuals
• Using a family trust with children over 18 as beneficiaries
could result in many CGE's

32. Income Splitting - Multiply Tax Savings
Capital Gains Exemption (CGE):
• If you need one more $750,000 exemption, I have not used
mine yet.
• I'm just saying . . . .

33. 3) Hybrid Expenses
• Home Office
• Automobile expenses
• Cell phones
• Medical expenses

34. Home Office Expenses
If you do not have an external office or you regularly meet
clients at your home, you can deduct a percentage of the costs
of your home (include HST).
Including:
• mortgage interest
• utilities, heat, hydro, gas, water, internet, phone
• insurance
• property taxes
• Repairs
Do not include capital improvements or you could ruin the
principal residence exemption.

35. Automobile Expenses
Company owned vehicle:
• Must calculate personal portion (keep all receipts)
• Taxable benefit does not decrease as the value of the
vehicle does.
• Calculations are messy
Personally owned vehicle:
• The driver charges the company mileage.
• Only need to keep log of company driving
• Tax deductible expense not taxable to driver.

36. Hybrid Expenses
Cell phones
• Have the cell phone billed to the company
• Charge back the owner for personal phone calls
Medical Expenses
• Medical insurance is deductible to the company but not
taxable to the employee
• Life and LTD insurance are taxable benefits and better paid
by the employee (or owned by the company).
• Consider a Health and Welfare Trust

37. 4) Sales Tax Savings
• Common pitfalls
o HST on meals
o HST on mileage
o Place of supply rules
• Restricted ITC's
o HST of vehicle purchases
o HST for large companies

38. Sales Tax Basics
Any business with over $30,000 in sales in any one year is
required to register for HST.
The HST collected on sales is offset by the HST paid on
purchases. The net amount is paid or refunded.
Register early, to claim ITCs on your start-up expenses.
There is a quick method for companies with sales under
$200,000.

39. Sales Tax - Meals
Meals are only 50% deductible for income tax purposes.
The CRA says you needed to eat any ways.
Under the same thinking the HST paid on meals is only
50% deductible.
Extra Tip:
Every business is allowed to fully deduct 6 meals a year as
long as all of the staff are invited (ie. Holiday Party,
Company BBQ, Throwing Tim a Birthday Party!)

40. Sales Tax - Mileage
HST registered companies paying mileage should also pay
HST on top of the mileage rate ($0.52 + HST).
This is an extra 13% in the individuals pocket that is
refundable to the company.
For every 2,000km that is an extra $135! WIN WIN!
If the company pays auto expenses and a taxable benefit to
the individual then HST should be added to the taxable
benefit.

41. Sales Tax - Place of Supply
Place of supply rules determine what rate of GST / HST to
charge.
There are some specific rules.
Otherwise the rate to charge is the rate in the province the
goods / services are being delivered to.
Sales to the US are zero rated (but must be included on
HST return).

42. Sales Tax - Place of Supply
Actual General Rule:
If a supply of a service is made and, in the normal course of
business, the suppler obtains a particular address of the recipient
that is (a) a home or business address in Canada of the recipient,
(b) where the supplier obtains more than one home or business
address in Canada of the recipient, the home or business address
that is most closely connected with the supply, or (c) where the
supplier does not obtain a home or business address in Canada of
the recipient, but obtains another Canadian address that is most
closely connected with the supply, the supply will be regarded as
made in the province which the particular address is situated.

43. Restricted ITCs on Autos
Passenger vehicles are limited to $30,000 plus tax.
HST credit on passenger vehicles is also limited.
This limit is not indexed to inflation.

44. Restricted ITCs on Autos
Why do you need such an expensive car?

45. Restricted ITCs on Autos
That's OK!
Tim told me to pay mileage instead!

46. Restricted ITCs for Large companies
For companies with over $10 million in sales some HST
ITCs are restricted.
The restriction applies to:
• Costs related to vehicles under 3,000 kg
• Energy for overhead (not in manufacturing)
• Telephone, satellite TV but not internet
• Meals

47. Restricted ITCs for Large companies
Restriction is currently 100% of provincial portion
of HST (8%).
Phasing out between July 1, 2015 and 2018
HST returns must show HST paid and HST restricted
separately.

48. Restricted ITCs for Large companies
Is there any good news?

49. Restricted ITCs for Large companies
Good News:
• Only required for large companies
• Large companies can afford to pay their accountant
extra to sort it out.

50. Restricted ITCs for Large companies
I actually like this rule!

51. Voluntary Taxes

52. 5) Avoiding Voluntary Taxes
• Interest and penalties
• Late filing
• Filing Thresholds
• Employment insurance
• Canada Pension Plan
• Employer Health Tax
• Separate wills

53. Interest and penalties
Interest and penalties are non-deductible.
Interest is charged at CRA plus 4%.
Currently that rate is 5%
That is the equivalent of 6% pre-tax interest

54. Late Filing Penalties
Late filing penalties are Nasty!

55. Penalties
Standard Penalties start at 10% of the tax owing.
The percentage can increase (double) for repeat offenders.
T4 and T5 penalties are $25 per day up to $2500
SRED claims are not allowed if filed 18 months after year end.
There is no penalty for filing on time but not paying.

56. Filing Thresholds - GST
Annual Taxable Assigned reporting Optional reporting
Supplies period period
It is the company's responsibility to inform the government of a
change in$1,500,000 or less
filing frequency. Annual Monthly or Quarterly
More than $1,500,000 Quarterly Monthly
up to $6,000,000
More than $6,000,000 Monthly Nil

57. Filing Thresholds - Source Deductions
It is the company's responsibility to inform the government of a
change in filing frequency.
AMWA - Average Monthly Withholding Amount
< $3,000 = Quarterly *
$3,000 - 15,000 = Monthly on the 15th
$15000 - 50000 = twice a month
$50,000 + = 4 times a month
To file quarterly you must have 12 months of perfect
compliance history.

58. Employment Insurance
Employment insurance is not required on directors / officers of
a corporation.
Also exempt are relatives of directors.
This could save an employee $800 / year and the company
$1,120 per year.
Consider paying EI for family that might take a parental leave.

59. Employment Insurance
Why is family exempt from Employment Insurance?

60. Employment Insurance
Because you could not fire them even if you wanted to!

61. Voluntary Taxes - CPP
Cannot opt out of CPP.
CPP is paid on wages (not dividends)
CPP is based on best 85% of years.
Consider switching to dividends when near retirement.
Saving $4,000 per year.
New CPP rules starting in 2012!

62. Avoiding Voluntary Taxes - EHT
Employer Health Tax is 1.95% on any wages paid in Ontario
over $400,000 (no exemption for owners).
Consider paying shareholders not through wages:
- Rent
- Interest on shareholder loan
- Dividends

63. Voluntary Taxes - Separate Wills
Probate is the administrative fee (not a tax) on an estate.
$5 per $1,000 on first $50,000
$15 per $1,000 afterwards
Most entrepreneurs largest asset is their company.
A separate will can exclude your company from probate.

64. Voluntary Taxes - Separate Wills
Quick Someone call a lawyer!

65. Questions?

66. Thank you!
Tim Miron, C.A.
Beckett Lowden Read, LLP
Burlington / Waterdown
905-333-5066
tim@blrca.ca
@TJMiron