Tax season is upon us, and many small businesses owners around Canada are busy getting their financials in order.
Salary vs. dividends. Holding companies. Many business owners are likely to be unfamiliar with the nature of these concepts. Yet tactics like these are essential to maximizing the value of your business. These tax tips prove that knowing your options can really pay off.
1. Increase your dividend pay-out
Many entrepreneurs never think to take part of their pay in dividends, to take advantage of a lower tax rate. You do want employment income at some point, to qualify you for RRSP contributions and the Canada Pension Plan. But depending on where you live, you can earn $30,000 to $40,000 in dividend income before you start paying tax. If you’re a young entrepreneur starting out, with minimal cash needs, you might even take all your income as dividends. Then you can change your income mix every year to reflect your changing needs.
2. Learn strategic income-splitting
Most entrepreneurs know how to cut taxes by splitting income with family members. The drawback is, they must be performing real work, and you must do the paperwork. You can eliminate such hassles by making family members shareholders and paying them dividends instead.
With a discretionary family trust, you can choose to whom to pay how much, and when. So if you have children in college, or parents in need of support, the business can help them with their costs directly as needed. When it’s time to sell your business, having multiple shareholders will enable greater leverage of the $800,000 capital gains exemption Canada Revenue Agency grants to qualifying business owners.
3. Speak to your accountant about "structure"
Start by thinking about family trusts or holding companies. If your business will own property, for instance, you can creditor-proof the operation by creating a separate company to own your real estate assets. If the operating company fails, your real estate company will be unaffected.
4. Create a separate company for tax-deferred investing
Outside of registered retirement plans, you normally invest with after-tax dollars. But by moving funds out of your business to a related holding company, you trigger no tax payments. You can then invest the CRA’s cash as you would your own personal funds. You’ll pay the tax eventually, but until then, you will have a bigger pool of capital to invest.
5. Be meticulous in your record keeping
Every accountant has horror stories about businesses that got careless about records for legitimate expenses such as website or cloud services, or claiming undocumented expenses. In fact, as of late, statistics show that a lot of people are getting sloppy. If that describes you, tax auditors can add fines to your unpaid taxes-- and the penalties increase if such behaviour is repeated. To avoid problems, be sure to do one thing: keep your corporate and personal expenses separate. If you’re offside, watch out: you may not get caught this year, you may not get caught next year, but if you get caught it will be painful.
By investigating and following these small business owner tax tips, you will have the opportunity to maximize your savings come tax time.
Related Reading: Tax Planning to Help you Protect your Hard-Earned Goodwill
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