Taking a byte out of taxes


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Taking a Byte Out of Taxes, by SB Partners

At: Silicon Halton Workshop Day at the @BurlingtonHive >> http://ow.ly/uhRdf
Presented: March 26, 2014

Published in: Technology, Business
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Taking a byte out of taxes

  1. 1. Workshop Day March 26 2014March 26, 2014 # hl | @ ili h lt | ili h lt#shlearn |  @siliconhalton |  www.siliconhalton.com 
  2. 2. Out of TaxesOut of Taxes @GregClarkeCA #shlearn By Greg Clarke, CPA, CA, Partner March 26, 2014
  3. 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 @GregClarkeCA @GregClarkeCA #shlearn
  4. 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 @GregClarkeCA #shlearn • Life Insurance • Sales to US Customers
  5. 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 @GregClarkeCA #shlearn
  6. 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  @GregClarkeCA #shlearn accordance with the rules of the Income Tax Act.
  7. 7. Your Business StructureYour Business Structure h / hProprietorship / Partnership –Income/loss is reported on your personal tax  return and taxed at your marginal tax rate @GregClarkeCA #shlearn
  8. 8. Your Business Structure Corporation • Income/loss is reported on a corporate tax return  and not on your personal tax  return • The only income you report is the income that you  earn from the corporation (i.e. salary/dividend) Reasons for Incorporating: @GregClarkeCA #shlearn • Risk Management • Deferral of Taxes
  9. 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. @GregClarkeCA #shlearn
  10. 10. Incorporation – The Tax Deferral! This can create a significant opportunity since more  after‐tax dollars will be retained in a corporation  which results in:which results in: • Higher positive cash flow to fund operations • Potentially less need for credit due to cash flow @GregClarkeCA #shlearn • More after‐tax dollars available for investments
  11. 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 @GregClarkeCA #shlearn $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. 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  @GregClarkeCA #shlearn corporation. But when is that???
  13. 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 @GregClarkeCA #shlearn $20,000 or more than your personal needs to  offset the annual compliance cost of the  corporationcorporation
  14. 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 @GregClarkeCA #shlearn Any investment income is taxed at 48% in the  corporation
  15. 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 @GregClarkeCA #shlearn
  16. 16. Capital Gain Exemption on Small  Business Shares Rules: • Shares must be of a Canadian Controlled  Private Small Business Corporation  • At time of disposition 90% of the• At time of disposition, 90% of the  corporation’s assets are directly used in active  business carried on in Canada • Shares were held for more than 24 months  preceding disposition with 50% of the assets  @GregClarkeCA #shlearn used in active business during that period
  17. 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 @GregClarkeCA #shlearn
  18. 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??? @GregClarkeCA #shlearn
  19. 19. Holding Company Shareholder Pay a dividend up to  the Holding Company  and invest the assets in  the holding company Holdco Dividend Still have a problem  since the holding  company doesn’t get a  l @GregClarkeCA #shlearn capital gain exemption Operating Company
  20. 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 @GregClarkeCA #shlearn the Family Trust level
  21. 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 @GregClarkeCA #shlearn free
  22. 22. Additional Benefit ‐ Family Trust  Structure • Provides ability to multiply the capital gain  exemption over several beneficiaries A typicalexemption over several beneficiaries. A typical  family of four results in an overall capital gain  exemption of $3 200 000exemption of $3,200,000 @GregClarkeCA #shlearn
  23. 23. Family Trust Structure BeneficiariesTrustee Corporate  Family  Trust Dividend Beneficiary Dividend @GregClarkeCA #shlearn Operating Company
  24. 24. Salary vs. Dividends SalarySalary • Results in a tax deduction to the company S d d ti ithh ld t• Source deductions withheld on payments • More administration involved • Qualifies to build up RRSP room @GregClarkeCA #shlearn
  25. 25. Salary vs. Dividends (cont’d) DividendsDividends • Not a tax deduction to the corporation • No source deductions withheld on payments • Does not qualify to build up RRSP room • More expensive than salary since the corporation  pays tax first and then the shareholder again @GregClarkeCA #shlearn pays tax first and then the shareholder again  (approx 2‐3% higher than salary in total)
  26. 26. Tax DeductionsTax Deductions Vehicle Three options available: • Deduct the business use portion of your vehicle  expenses on your personal tax return. • The company can reimburse you for business useThe company can reimburse you for business use  of the vehicle via  i) a per kilometer rate or  ii) thl ll ( t h t f lii) a monthly allowance (watch out for personal  tax issues!) • The company can own or lease the vehicle but  @GregClarkeCA #shlearn p y this is a taxable benefit to you for the personal  use portion of the vehicle expenses.
  27. 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 @GregClarkeCA #shlearn
  28. 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 @GregClarkeCA #shlearn • Ensure you track your meals & entertainment  appropriately
  29. 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 @GregClarkeCA #shlearn • At time of death, proceeds on the policy are  paid to the corporation
  30. 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 @GregClarkeCA #shlearn
  31. 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 @GregClarkeCA #shlearn • Don’t charge HST to customer outside Canada
  32. 32. Questions? Greg Clarke (905) 633‐6323(905) 633 6323 gclarke@sbpartners.ca @G Cl k CA@GregClarkeCA #shlearn @GregClarkeCA #shlearn