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Tax planning strategies
 

Tax planning strategies

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Module 4 of the Canadian Small Business Course looks at the topic areas related to tax planning and strategies you can utilize to save taxes. ...

Module 4 of the Canadian Small Business Course looks at the topic areas related to tax planning and strategies you can utilize to save taxes.

In this course module we review strategies such as paying family members through a business, paying your child's tuition through a corporation and issuing shares to family members.

Also reviewed are a few advanced tax planning strategies that will enable you to pay medical expenses through your business and set up a company pension plan.

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  • excellent presentation. I will use some of these points on my website at pws-intl.com
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  • Add a module on “Funding your Retirement” – keeping retained earnings in the corporation and then paying dividends to family shareholders when its time to retire. Show example of how this would work.Also add some detail about establishing a holding company to bump up the R/E and protect the shareholders from creditors.Look at the NOP presentation on insurance strategies in shareholder agreements, maybe do some more research in this area
  • Another significant aspect of shareholdings, the capital gains exemptionSelling the business assets vs. Selling the shares

Tax planning strategies Tax planning strategies Presentation Transcript

  • MODULE 4
    Tax Planning
    Strategies
  • Is it reasonable?
    What would you pay someone unrelated?
    Substantial tax savings
  • Keep track of their time like other employees
    Actually pay them – deposits into their account
  • Lend money for tuition
    Include in child’s income
    After graduation and working, repay the loan
    Upon repayment, deduct from income
  • Classes of Shares
    • Important to setup share structure properly from the start
    • Different classes of shares for various family members
  • Issuing Shares
    • Attracting investors into the business
    • Succession planning
    • Rewarding and motivating key employees
    • Income splitting – dividends, capital gains exemption
  • ISSUING SHARES TO FAMILY
    Mr. Smith: Class “A” shares
    Mrs. Smith: Class “B” shares
    Kids: Class “C” Preference
  • PAYING DIVIDENDS
    Distributing profit to the shareholders
    No need to worry about family members actually working in business
    Lucrative especially if no other sources of personal income
    Separate classes provide much greater flexibility to split income
  • Capital Gains Exemption (CGE)
    Up to $750,000 can be sheltered
    Qualify
    No investment assets
    Assets (90%) used in business
    Canadian resident
  • Private Health Service Plan (PHSP)
    Employee Profit Sharing Plan (EPSP)
    Individual Pension Plan (IPP)
    Retirement Compensation Arrangement (RCA)
  • PRIVATE HEALTH SERVICE PLAN
    PHSP converts health, medical and dental expenses into fully deductible business expenses
    Company owned – covers owners, employees and their family members
    Low costs to maintain – 10% of medical claim instead of a monthly premium that must be paid regardless
  • PHSP (Con’t)
    No monthly premiums or deductibles – Notan insurance plan, therefore no monthly premiums
    No medical qualifying – Medical histories of those covered are not a consideration
    Stand alone or supplement existing plan – Can keep existing plan and supplement or top-up those expenses not covered under existing plans
  • Administered by a Trustee
    Do not exclude everybody arbitrarily
    Benefit as a shareholder risk (CRA)
    Solution
    Have it available only to officers
    Offer it to all employees with maximum
  • EMPLOYEE PROFIT SHARING PLAN
    Problem facing the Canada Pension Plan
    The CPP is a pay-as-you-go system. Every time CPP is withheld and remitting from pay cheques, they go immediately to funding current retired Canadians
    There are currently 5 Canadians working for every 2 that are retired.
    In 25 years due to the aging population, there will only be 2 Canadians working for every 1 retiree
    Thus, CPP premiums will either have to increase or pensions will have to be clawed back or decreased
    You may find that if you are relying on the gov’t to fund your pension, it may not be there
  • EPSP BENEFITS
    Features of both a salary and dividends. No CPP (or EI) contributions on the payments. Like the hybrid of compensation strategies
    RRSP eligible – All income paid out under the EPSP is considered “earned income” under the ITA and eligible in determining the RRSP limit
    Income splitting – The payments distributed through an EPSP are not subject to the same reasonability test as salaries. Therefore ideal for income splitting
    Estate planning – you decide your beneficiaries instead of CPP pension reduced to 60% for spouse
  • Setup properly with all legal documents
    Administered by a Trustee
    If there is no T4, how can you be an employee?
    Flow of funds through a bank account and not just journal entries by accountant
    Solution
    Have a small amount paid as salary
    Separate bank account and to flow
    all payments from the EPSP
  • CPP premiums = $4,400
    Invest the savings (RRSP or TFSA)
    Purchase an annuity with funds
  • IPP ADVANTAGES
    Greater deductions – Owner able to make annual tax-sheltered contributions that are greater than those permitted by an RRSP
    Creditor proof - IPPs are creditor proof unlike RRSPs in which the creditor proofing has recently been cast in doubt by the courts
    Deductible contributions – all of the contributions made to the IPP are deductible expenses to the Corp
    Surpluses revert to spouse or estate – Unlike other pension plans, when the member dies the assets revert to the spouse or member’s estate
  • IPP DISADVANTAGES
    Locking-in – plan assets cannot be de-registered as assets must be used to provide a lifetime retirement pension
    Spousal RRSP – an equivalent to spousal RRSPs is not permitted under an IPP. However, the spouse can be enrolled in the IPP
    Contributions are not flexible – The contributions in an IPP are required annually and there are no carry-forward options. In a lower income year, may have to get a business loan to fund the IPP
    Complexity – IPP’s are more complex than RRSPs and the costs to maintain and administer are higher
  • RETIREMENT COMPENSAION ARRANGEMENT (RCA)
    Vehicle to fund retirement and substantially defer taxes
    Becomes extremely beneficial when a corporation’s profits exceed the small business deduction limit of $500,000
    Make a contribution to the RCA as specified by an Actuarial Certificate. This contribution becomes a tax deduction to the corporation
    The income in the RCA is taxed when it is withdrawn from the RCA at retirement. Can be a substantial tax deferral and tax savings since income at retirement will likely be lower, thus a lower tax bracket
  • Canadian Small Business Course
    www.sbclearnbusiness.com
    Visit us online and take the Canadian Small Business Course for the in-depth video tutorials on the slides in this presentation
  • Canadian Small Business Course
    www.sbclearnbusiness.com
    Or take individual modules such as this presentation:
    Module 1: Forms of business organization
    Module 2: Starting a business step-by-step
    Module 3: Compensation strategies
    Module 4: Tax planning and strategies
    Module 5: Expenses and deductions