You have substantial assets and a long-term commitment to your business and employees as a business owner. This can significantly affect the company and your family’s financial security. Therefore, following a business strategy is essential to protect your personal and business investment.
Your chosen strategy should be carefully structured and include tax and estate planning components that organize your assets tax-effectively. Your Ottawa-certified financial planner can help you decide on the best strategy from those we have outlined in this blog.
Read further to find out strategies to help you reduce your taxes.
Personal Tax Planning
Canada provides several income-splitting options to owners of private corporations to benefit their families, including;
Paying salaries to family members
You can split income with your family members by employing them in the corporation and paying them a salary based on the services they provide. Because they receive salaries, you can create a Retirement Savings Plan (RSP) contribution room to generate QPP/CPP pensionable earnings. You should note that, according to the tax rules, you have to pay a salary or bonus that does not exceed the value of the rendered services.
Paying dividends to adult family members
If you have an active corporation, you can create a family trust that allows you to transfer some or all of the business’s future growth to your family’s next generation using an estate freeze. This business succession strategy will enable you to split income with your family members by paying dividends from the corporation to your spouse and adult children. Depending on the province they live in, your family can receive up to $30,000 in tax-free dividends as long as they have no other income.
Multiplying the capital gains exemption
You can multiply the capital gains exemption when you sell the qualifying shares of your business available to you and your family. This helps to increase your family’s after-tax assets significantly. For example, you can create a family trust that owns the operating company and name your family members as beneficiaries of the trust. Then, when you sell the trust’s qualifying shares, you can allocate the resulting capital gains to each beneficiary, and in turn, they can claim capital gains exemption.
Business Tax Planning
If you own a private Canadian corporation that earns active business income, you can consider the following strategies for your business;
Bonus down to stay within the small business limit or retain more funds
Private Canadian corporations are taxed at a favorable small business rate for the first $400,000 active business income earned. Income above this limit can be taxed at even higher rates, depending on the province. While business owners hardly leave active business income over $400,000 in the corporation account, they pay a bonus to ensure the business income stays within the favorable tax limit.
But if your business makes more income than you need for short-term personal expenses, you should retain some funds above the small business limit. This may qualify you for increased tax deferral from lower corporate rates. It also makes you eligible for reduced tax costs from lower personal rates on suitable dividends when the corporation pays out dividends to its shareholders.
Another option is to pay these out as bonuses or salaries instead of dividends. This option is ideal for situations where there is an immediate or short-term use for income funds.
Keep your corporation as a “qualifying small business corporation
You can take advantage of the capital gains exemption when you eventually sell the shares of a qualifying small business corporation (QSBC). The exemption is currently at $750,000 and is available to individual shareholders of Canadian private corporations. In addition, the exemption represents a sizable tax saving.
Your corporation only qualifies for the exemption if it meets the QSBC status at the time of sale and 24 months before.
As a private Canadian corporation owner, you can reduce your taxes by taking advantage of the strategies discussed in this article. Personal tax strategies include paying salaries and dividends to family members, while business tax strategies include maintaining a small business status.
As reputable Ottawa CFPs, we will be happy to point you to the best tax planning strategy for your personal or business needs. Contact us today.