MODULE 4

Tax Planning

Strategies

Is it reasonable?

What would you pay someone unrelated?

Substantial tax savings

Keep track of their time like other employees

Actually pay them – deposits into their account

1. Lend money for tuition

2. Include in child’s income

3. After graduation and working, repay the loan

4. Upon repayment, deduct from income

Classes of Shares

• Important to setup share structure properly from the start

• Different classes of shares for various family members

Issuing Shares

• Attracting investors into the business

• Succession planning

• Rewarding and motivating key employees

• Income splitting – dividends, capital gains exemption

ISSUING SHARES TO FAMILY

Mr. Smith: Class “A” sharesMrs. Smith: Class “B” shares

Kids:Class “C” Preference

PAYING DIVIDENDS

• Distributing profit to the shareholders

• No need to worry about family members actually working in business

• Lucrative especially if no other sources of personal income

• Separate classes provide much greater flexibility to split income

Capital Gains Exemption (CGE)

Up to $750,000 can be sheltered

Qualify1. No investment assets2. Assets (90%) used in business3. Canadian resident

Private Health Service Plan (PHSP)

Employee Profit Sharing Plan (EPSP)

Individual Pension Plan (IPP)

Retirement Compensation Arrangement (RCA)

PRIVATE HEALTH SERVICE PLAN

PHSP converts health, medical and dental expenses into fully deductible business expenses

• Company owned – covers owners, employees and their family members

• Low costs to maintain – 10% of medical claim instead of a monthly premium that must be paid regardless

PHSP (Con’t)

• No monthly premiums or deductibles – Not an insurance plan, therefore no monthly premiums

• No medical qualifying – Medical histories of those covered are not a consideration

• Stand alone or supplement existing plan – Can keep existing plan and supplement or top-up those expenses not covered under existing plans

Administered by a Trustee

Do not exclude everybody arbitrarily

Benefit as a shareholder risk (CRA)

Solution Have it available only to officersOffer it to all employees with maximum

EMPLOYEE PROFIT SHARING PLAN

Problem facing the Canada Pension Plan• 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

• There are currently 5 Canadians working for every 2 that are retired.

• In 25 years due to the aging population, there will only be 2 Canadians working for every 1 retiree

• Thus, CPP premiums will either have to increase or pensions will have to be clawed back or decreased

• You may find that if you are relying on the gov’t to fund your pension, it may not be there

EPSP BENEFITS

• Features of both a salary and dividends. No CPP (or EI) contributions on the payments. Like the hybrid of compensation strategies

• RRSP eligible – All income paid out under the EPSP is considered “earned income” under the ITA and eligible in determining the RRSP limit

• Income splitting – The payments distributed through an EPSP are not subject to the same reasonability test as salaries. Therefore ideal for income splitting

• Estate planning – you decide your beneficiaries instead of CPP pension reduced to 60% for spouse

Setup properly with all legal documents

Administered by a Trustee

If there is no T4, how can you be an employee?

Flow of funds through a bank account and not just journal entries by accountant

Solution Have a small amount paid as salary

Separate bank account and to flowall payments from the EPSP

CPP premiums = $4,400

Invest the savings (RRSP or TFSA)

Purchase an annuity with funds

IPP ADVANTAGES

• Greater deductions – Owner able to make annual tax-sheltered contributions that are greater than those permitted by an RRSP

• Creditor proof - IPPs are creditor proof unlike RRSPs in which the creditor proofing has recently been cast in doubt by the courts

• Deductible contributions – all of the contributions made to the IPP are deductible expenses to the Corp

• Surpluses revert to spouse or estate – Unlike other pension plans, when the member dies the assets revert to the spouse or member’s estate

IPP DISADVANTAGES

• Locking-in – plan assets cannot be de-registered as assets must be used to provide a lifetime retirement pension

• Spousal RRSP – an equivalent to spousal RRSPs is not permitted under an IPP. However, the spouse can be enrolled in the IPP

• 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

• Complexity – IPP’s are more complex than RRSPs and the costs to maintain and administer are higher

RETIREMENT COMPENSAION ARRANGEMENT (RCA)

• Vehicle to fund retirement and substantially defer taxes

• Becomes extremely beneficial when a corporation’s profits exceed the small business deduction limit of $500,000

• Make a contribution to the RCA as specified by an Actuarial Certificate. This contribution becomes a tax deduction to the corporation

• 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

Canadian Small Business Course

www.sbclearnbusiness.com

Visit us online and take the Canadian Small Business Course for the in-depth video

tutorials on the slides in this presentation

Canadian Small Business Course

www.sbclearnbusiness.com

Or take individual modules such as this presentation:

Module 1: Forms of business organization

Module 2: Starting a business step-by-step

Module 3: Compensation strategies

Module 4: Tax planning and strategies

Module 5: Expenses and deductions