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.

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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  • 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

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