Incorporation for Professionals Spring 2011
Introduction <ul><li>“ I have something my tax doctor calls ‘narcotaxis.’  Within 20 seconds of hearing someone launch int...
Why incorporate? <ul><li>Tax deferral </li></ul><ul><li>Income-splitting </li></ul><ul><li>Limited liability (generally ap...
Tax Deferral <ul><li>13.5% corporate tax rate on active business income up to $500,000 </li></ul><ul><li>26.5% corporate t...
Tax Deferral Taxable Income Personal Tax Rate Corporate Tax Rate Difference $0 $36,146 20.06% 13.50% 6.56% $36,147 $41,544...
Tax Deferral Taxable Income Personal Tax Rate Corporate Tax Rate Difference $83,001 $83,088 34.29% 13.50% 20.79% $83,089 $...
Tax Deferral <ul><li>At the highest marginal personal tax rate, the deferral, advantage is over 30% </li></ul><ul><li>That...
Taxation of Corporate Investment Income Investment Income Corporate Tax Rate Refundable Tax “ Net” Tax Rate Interest 44.67...
Investment Asset Allocation <ul><li>Interest income in RRSP </li></ul><ul><li>Dividends and capital gains in company </li>...
Income-Splitting <ul><li>Spouses, including common-law and same-sex couples </li></ul><ul><li>Children </li></ul><ul><li>-...
Limited Liability <ul><li>Not applicable to liability arising from the provision of most professional services </li></ul><...
Compensation Planning <ul><li>Salary vs. dividends </li></ul><ul><li>CPP considerations </li></ul><ul><li>RRSP considerati...
Salary <ul><li>Deductible to company </li></ul><ul><li>CPP applies </li></ul><ul><li>- 9.9% combined rate, up to YMPE </li...
Dividends <ul><li>Not deductible to company </li></ul><ul><li>- paid out of after-tax income </li></ul><ul><li>No CPP obli...
Tax Planning <ul><li>“ I’m proud to pay taxes…; the only thing is, I could be just as proud for half the money.” </li></ul...
Employees Profit Sharing Plan <ul><li>EPSP contributions deductible to company </li></ul><ul><li>NO CPP obligations </li><...
Private Health Services Plan <ul><li>Deductible to company, subject to reasonableness tests </li></ul><ul><li>No taxable b...
Tax Planning <ul><li>Life insurance </li></ul><ul><li>Critical illness insurance </li></ul><ul><li>Disability insurance </...
Tax Planning <ul><li>Transfer of non-registered investments </li></ul><ul><li>- create tax-free shareholder’s loan balance...
Tax Planning <ul><li>Understand that there’s generally always a tax cost to withdrawing funds from the company (i.e., lost...
CRAs Top 10 Audit List <ul><li>1. Verification of capital gains and losses </li></ul><ul><li>2. Allowable business investm...
CRAs Top 10 Audit List <ul><li>6.  Large charitable donations or donations </li></ul><ul><li>  of property </li></ul><ul><...
David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version) <ul><li>10. Send tax return to NRA instead of CRA, since NRA <...
David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version) <ul><li>5. Report $1 billion income so CRA will think you’re <...
Final Comments <ul><li>“ Remember, today is the tomorrow that you worried about yesterday” </li></ul><ul><li>Dale Carnegie...
Questions?
Contact Information <ul><li>John Groenewold, CGA, CFP, TEP </li></ul><ul><li>Groenewold + Associates </li></ul><ul><li>410...
Legal Disclaimer <ul><li>This presentation is not intended to provide legal, accounting, tax or specific investment advice...
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Incorporation (2011)

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Incorporation (2011)

  1. 1. Incorporation for Professionals Spring 2011
  2. 2. Introduction <ul><li>“ 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.” </li></ul><ul><li>Russell Baker, columnist and journalist </li></ul>
  3. 3. Why incorporate? <ul><li>Tax deferral </li></ul><ul><li>Income-splitting </li></ul><ul><li>Limited liability (generally applicable to business owners, but not to professionals) </li></ul>
  4. 4. Tax Deferral <ul><li>13.5% corporate tax rate on active business income up to $500,000 </li></ul><ul><li>26.5% corporate tax rate on active business over $500,000 </li></ul>
  5. 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. 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. 7. Tax Deferral <ul><li>At the highest marginal personal tax rate, the deferral, advantage is over 30% </li></ul><ul><li>That means within the corporation, you have $0.30 more on every after-tax dollar to invest </li></ul><ul><li>Huge opportunity to accelerate wealth accumulation </li></ul><ul><li>View the company as an enhancement or substitute for RRSP investing </li></ul>
  8. 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. 9. Investment Asset Allocation <ul><li>Interest income in RRSP </li></ul><ul><li>Dividends and capital gains in company </li></ul><ul><li>- the tax preferred status of dividends and capital gains is lost in the RRSP </li></ul>
  10. 10. Income-Splitting <ul><li>Spouses, including common-law and same-sex couples </li></ul><ul><li>Children </li></ul><ul><li>- adult children (18 and over), OK </li></ul><ul><li>- minor children, not OK (“kiddie-tax”) </li></ul><ul><li>Consider Trust, rather than direct share ownership </li></ul>
  11. 11. Limited Liability <ul><li>Not applicable to liability arising from the provision of most professional services </li></ul><ul><li>But does apply to other forms of liability </li></ul><ul><li>Consider Holdco for investments to enhance creditor-protection, particularly with Trust as Holdco shareholder </li></ul>
  12. 12. Compensation Planning <ul><li>Salary vs. dividends </li></ul><ul><li>CPP considerations </li></ul><ul><li>RRSP consideration </li></ul><ul><li>Income-splitting opportunities </li></ul>
  13. 13. Salary <ul><li>Deductible to company </li></ul><ul><li>CPP applies </li></ul><ul><li>- 9.9% combined rate, up to YMPE </li></ul><ul><li>- $4,435 annual contribution </li></ul><ul><li>- 87% increase since 2000 </li></ul><ul><li>- future increases? </li></ul><ul><li>Generates RRSP contribution room </li></ul><ul><li>Restrictions on income-splitting </li></ul><ul><li>Payroll registration, monthly remittances </li></ul>
  14. 14. Dividends <ul><li>Not deductible to company </li></ul><ul><li>- paid out of after-tax income </li></ul><ul><li>No CPP obligations </li></ul><ul><li>No RRSP contribution room </li></ul><ul><li>Flexible income-splitting, no restrictions </li></ul><ul><li>No payroll registration required </li></ul>
  15. 15. Tax Planning <ul><li>“ I’m proud to pay taxes…; the only thing is, I could be just as proud for half the money.” </li></ul><ul><li>Arthur Godfrey </li></ul><ul><li>Tax evasion is illegal, tax avoidance is your right! </li></ul>
  16. 16. Employees Profit Sharing Plan <ul><li>EPSP contributions deductible to company </li></ul><ul><li>NO CPP obligations </li></ul><ul><li>Generates RRSP contribution room </li></ul><ul><li>Income-splitting may be restricted, subject to GAAR </li></ul><ul><li>Tax deferral </li></ul>
  17. 17. Private Health Services Plan <ul><li>Deductible to company, subject to reasonableness tests </li></ul><ul><li>No taxable benefit to employee </li></ul><ul><li>Direct reimbursement vs. “trusteed” third party plan </li></ul>
  18. 18. Tax Planning <ul><li>Life insurance </li></ul><ul><li>Critical illness insurance </li></ul><ul><li>Disability insurance </li></ul><ul><li>Club fees and dues </li></ul><ul><li>Death benefit </li></ul>
  19. 19. Tax Planning <ul><li>Transfer of non-registered investments </li></ul><ul><li>- create tax-free shareholder’s loan balance </li></ul><ul><li>- rollover vs. taxable transfer, capital gains tax rates vs. dividend tax rates </li></ul><ul><li>- utilize capital loss carry-forwards </li></ul>
  20. 20. Tax Planning <ul><li>Understand that there’s generally always a tax cost to withdrawing funds from the company (i.e., lost tax deferral) </li></ul><ul><li>Consider minimizing personal mortgage payments </li></ul><ul><li>Consider leasing vs. buying automobile </li></ul>
  21. 21. CRAs Top 10 Audit List <ul><li>1. Verification of capital gains and losses </li></ul><ul><li>2. Allowable business investment losses </li></ul><ul><li> (ABILs) </li></ul><ul><li>3. Carrying charges </li></ul><ul><li>4. Foreign tax credits </li></ul><ul><li>5. Province of residence </li></ul>
  22. 22. CRAs Top 10 Audit List <ul><li>6. Large charitable donations or donations </li></ul><ul><li> of property </li></ul><ul><li>7. Employment expenses </li></ul><ul><li>8. Child care expenses </li></ul><ul><li>9. Mining and oil and gas investment </li></ul><ul><li> income reporting </li></ul><ul><li>10. Tuition/education expenses </li></ul>
  23. 23. David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version) <ul><li>10. Send tax return to NRA instead of CRA, since NRA </li></ul><ul><li> never pays taxes </li></ul><ul><li>9. Answer every question with, “Wouldn’t you like to </li></ul><ul><li> know?” </li></ul><ul><li>8. Hide all money in mattress; on return write “No </li></ul><ul><li> money hidden in mattress” </li></ul><ul><li>7. If you’ve just eaten, don’t do taxes for at least half an </li></ul><ul><li> hour </li></ul><ul><li>6. Hire yourself as an employee, fire yourself, sue </li></ul><ul><li> yourself for discrimination, deduct court costs </li></ul>
  24. 24. David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version) <ul><li>5. Report $1 billion income so CRA will think you’re </li></ul><ul><li> some sort of big shot </li></ul><ul><li>4. For charitable donations, list $9 you spent on last </li></ul><ul><li> Kevin Costner movie </li></ul><ul><li>3. Fill out Simplified Return because it has only two </li></ul><ul><li> lines. </li></ul><ul><li>2. Find out those two lines are: 1) “How much money </li></ul><ul><li> did you make?” and 2) “Send it to us.” </li></ul><ul><li>1. List your imaginary friend as a dependant </li></ul>
  25. 25. Final Comments <ul><li>“ Remember, today is the tomorrow that you worried about yesterday” </li></ul><ul><li>Dale Carnegie </li></ul><ul><li>Don’t procrastinate! </li></ul>
  26. 26. Questions?
  27. 27. Contact Information <ul><li>John Groenewold, CGA, CFP, TEP </li></ul><ul><li>Groenewold + Associates </li></ul><ul><li>410 – 1508 West Broadway </li></ul><ul><li>Vancouver, BC V6J 1W8 </li></ul><ul><li>(604) 683-3488 (phone) </li></ul><ul><li>(888) 349-8834 (fax) </li></ul><ul><li>[email_address] </li></ul>
  28. 28. Legal Disclaimer <ul><li>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. </li></ul>

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