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Incorporation (2011)

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  • 1. Incorporation for Professionals Spring 2011
  • 2. Introduction
    • “ I have something my tax doctor calls ‘narcotaxis.’ Within 20 seconds of hearing someone launch into an explanation of tax laws, my eyes become glassy, my body loses all feeling and I go into a shallow coma.”
    • Russell Baker, columnist and journalist
  • 3. Why incorporate?
    • Tax deferral
    • Income-splitting
    • Limited liability (generally applicable to business owners, but not to professionals)
  • 4. Tax Deferral
    • 13.5% corporate tax rate on active business income up to $500,000
    • 26.5% corporate tax rate on active business over $500,000
  • 5. Tax Deferral Taxable Income Personal Tax Rate Corporate Tax Rate Difference $0 $36,146 20.06% 13.50% 6.56% $36,147 $41,544 22.70% 13.50% 9.20% $41,545 $72,293 29.70% 13.50% 16.20% $72,294 $83,001 32.50% 13.50% 19.00%
  • 6. Tax Deferral Taxable Income Personal Tax Rate Corporate Tax Rate Difference $83,001 $83,088 34.29% 13.50% 20.79% $83,089 $100,787 38.29% 13.50% 24.79% $100,788 $128,800 40.70% 13.50% 27.20% $128,800 and up 43.70% 13.50% 30.20%
  • 7. Tax Deferral
    • At the highest marginal personal tax rate, the deferral, advantage is over 30%
    • That means within the corporation, you have $0.30 more on every after-tax dollar to invest
    • Huge opportunity to accelerate wealth accumulation
    • View the company as an enhancement or substitute for RRSP investing
  • 8. Taxation of Corporate Investment Income Investment Income Corporate Tax Rate Refundable Tax “ Net” Tax Rate Interest 44.67% 26.67% 18% Rent 44.67% 26.67% 18% Dividends 33.33% 33.33% 0% Capital gains 22.33% 13.33% 9%
  • 9. Investment Asset Allocation
    • Interest income in RRSP
    • Dividends and capital gains in company
    • - the tax preferred status of dividends and capital gains is lost in the RRSP
  • 10. Income-Splitting
    • Spouses, including common-law and same-sex couples
    • Children
    • - adult children (18 and over), OK
    • - minor children, not OK (“kiddie-tax”)
    • Consider Trust, rather than direct share ownership
  • 11. Limited Liability
    • Not applicable to liability arising from the provision of most professional services
    • But does apply to other forms of liability
    • Consider Holdco for investments to enhance creditor-protection, particularly with Trust as Holdco shareholder
  • 12. Compensation Planning
    • Salary vs. dividends
    • CPP considerations
    • RRSP consideration
    • Income-splitting opportunities
  • 13. Salary
    • Deductible to company
    • CPP applies
    • - 9.9% combined rate, up to YMPE
    • - $4,435 annual contribution
    • - 87% increase since 2000
    • - future increases?
    • Generates RRSP contribution room
    • Restrictions on income-splitting
    • Payroll registration, monthly remittances
  • 14. Dividends
    • Not deductible to company
    • - paid out of after-tax income
    • No CPP obligations
    • No RRSP contribution room
    • Flexible income-splitting, no restrictions
    • No payroll registration required
  • 15. Tax Planning
    • “ I’m proud to pay taxes…; the only thing is, I could be just as proud for half the money.”
    • Arthur Godfrey
    • Tax evasion is illegal, tax avoidance is your right!
  • 16. Employees Profit Sharing Plan
    • EPSP contributions deductible to company
    • NO CPP obligations
    • Generates RRSP contribution room
    • Income-splitting may be restricted, subject to GAAR
    • Tax deferral
  • 17. Private Health Services Plan
    • Deductible to company, subject to reasonableness tests
    • No taxable benefit to employee
    • Direct reimbursement vs. “trusteed” third party plan
  • 18. Tax Planning
    • Life insurance
    • Critical illness insurance
    • Disability insurance
    • Club fees and dues
    • Death benefit
  • 19. Tax Planning
    • Transfer of non-registered investments
    • - create tax-free shareholder’s loan balance
    • - rollover vs. taxable transfer, capital gains tax rates vs. dividend tax rates
    • - utilize capital loss carry-forwards
  • 20. Tax Planning
    • Understand that there’s generally always a tax cost to withdrawing funds from the company (i.e., lost tax deferral)
    • Consider minimizing personal mortgage payments
    • Consider leasing vs. buying automobile
  • 21. CRAs Top 10 Audit List
    • 1. Verification of capital gains and losses
    • 2. Allowable business investment losses
    • (ABILs)
    • 3. Carrying charges
    • 4. Foreign tax credits
    • 5. Province of residence
  • 22. CRAs Top 10 Audit List
    • 6. Large charitable donations or donations
    • of property
    • 7. Employment expenses
    • 8. Child care expenses
    • 9. Mining and oil and gas investment
    • income reporting
    • 10. Tuition/education expenses
  • 23. David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version)
    • 10. Send tax return to NRA instead of CRA, since NRA
    • never pays taxes
    • 9. Answer every question with, “Wouldn’t you like to
    • know?”
    • 8. Hide all money in mattress; on return write “No
    • money hidden in mattress”
    • 7. If you’ve just eaten, don’t do taxes for at least half an
    • hour
    • 6. Hire yourself as an employee, fire yourself, sue
    • yourself for discrimination, deduct court costs
  • 24. David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version)
    • 5. Report $1 billion income so CRA will think you’re
    • some sort of big shot
    • 4. For charitable donations, list $9 you spent on last
    • Kevin Costner movie
    • 3. Fill out Simplified Return because it has only two
    • lines.
    • 2. Find out those two lines are: 1) “How much money
    • did you make?” and 2) “Send it to us.”
    • 1. List your imaginary friend as a dependant
  • 25. Final Comments
    • “ Remember, today is the tomorrow that you worried about yesterday”
    • Dale Carnegie
    • Don’t procrastinate!
  • 26. Questions?
  • 27. Contact Information
    • John Groenewold, CGA, CFP, TEP
    • Groenewold + Associates
    • 410 – 1508 West Broadway
    • Vancouver, BC V6J 1W8
    • (604) 683-3488 (phone)
    • (888) 349-8834 (fax)
    • [email_address]
  • 28. Legal Disclaimer
    • This presentation is not intended to provide legal, accounting, tax or specific investment advice. If such advice is required, the services of a competent professional should be sought. The information contained in this presentation was obtained or compiled from sources believed to be reliable. However, Groenewold + Associates cannot represent that the information presented is accurate or complete. Groenewold + Associates disclaims any responsibility or liability for any reliance placed on the content of this presentation.

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