Taking a byte out of taxes

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Taking a Byte Out of Taxes, by SB Partners www.sbpartners.ca At: Silicon Halton Workshop Day at the @BurlingtonHive >> http://ow.ly/uhRdf Presented: March 26, 2014 www.siliconhalton.com @siliconhalton #shlearn

Text of Taking a byte out of taxes

  • 1. WorkshopDay March 26 2014March26,2014 # hl | @ ili h lt | ili h lt#shlearn |@siliconhalton |www.siliconhalton.com

2. Out of TaxesOutofTaxes @GregClarkeCA #shlearn ByGregClarke,CPA,CA,Partner March26,2014 3. Myroleasaprofessionalisto i li ll h igivemyclientsalltheoptions andinformationtheyneedto k i f d d i i It Greg Clarke, CPA, CA makeinformeddecisions.Its importantforthemtohave ti l l ti t th i GregClarke,CPA,CA Partner practicalsolutionstotheir challengesandarealistic t f ll il bl 9056336323 assessmentofallavailable opportunities. 905 633 6323 gclarke@sbpartners.ca @GregClarkeCA @GregClarkeCA #shlearn 4. Agenda What is Tax Planning?WhatisTaxPlanning? BusinessStructure Capital Gain Exemption and Corporate StructuringCapitalGainExemptionandCorporateStructuring Salaryvs.Dividends Tax Deductions TaxDeductions Meals&Entertainment Life Insurance @GregClarkeCA #shlearn LifeInsurance SalestoUSCustomers 5. TaxPlanning=TaxEfficiency Ensuring that you dont pay more tax than youEnsuringthatyoudon tpaymoretaxthanyou havetowillhaveadirectimpactonthe wealth that you retainwealththatyouretain Taxplanningisnotaoneplanfitsall approach but is specific to the individualapproach butisspecifictotheindividual circumstancesofthebusinessandtheowner @GregClarkeCA #shlearn 6. TaxPlanning=TaxEfficiency TwoMethodsofApproach: 1 f l1. TaxDeferral Deferthepaymentoftaxtoapointinthefutureand earnarateofreturnontheunpaidtaxes.Thelonger thedeferral,thebetter! 2. TaxSavings Avoidthepaymentoftaxbytakingproperstepsin @GregClarkeCA #shlearn accordancewiththerulesoftheIncomeTaxAct. 7. Your Business StructureYourBusinessStructure h / hProprietorship/Partnership Income/lossisreportedonyourpersonaltax returnandtaxedatyourmarginaltaxrate @GregClarkeCA #shlearn 8. YourBusinessStructure Corporation Income/lossisreportedonacorporatetaxreturn andnotonyourpersonaltaxreturn Theonlyincomeyoureportistheincomethatyou earnfromthecorporation(i.e.salary/dividend) ReasonsforIncorporating: @GregClarkeCA #shlearn RiskManagement DeferralofTaxes 9. Incorporation The Tax Deferral!Incorporation TheTaxDeferral! Corporationsaretaxedatlowerratesthan individuals thereby creating the ability to deferindividualstherebycreatingtheabilitytodefer someincometaxesuntilalaterpointwhenyou need the incomeneedtheincome. @GregClarkeCA #shlearn 10. Incorporation TheTaxDeferral! Thiscancreateasignificantopportunitysincemore aftertaxdollarswillberetainedinacorporation which results in:whichresultsin: Higherpositivecashflowtofundoperations Potentiallylessneedforcreditduetocashflow @GregClarkeCA #shlearn Moreaftertaxdollarsavailableforinvestments 11. How Much is the Difference?HowMuchistheDifference? $11 138 $43 953 $83 237 $136 270$11,138 - $43,953 $43,953 - $83,237 $83,237 - $136,270 $136,270- 514,090 Personal Tax Rate 24 15% 32 98% 43 41% 46 41%Rate 24.15% 32.98% 43.41% 46.41% Corporate Tax Rate (1) 15.50% 15.50% 15.50% 15.50% Deferral 8.65% 17.48% 27.91% 30.91% Deferral Per @GregClarkeCA #shlearn $1,000 $86.50 $174.80 $279.10 $309.10 (1) Corporate tax rate used is for taxable income up to $500 000taxable income up to $500,000 12. Once a Proprietor Always aOnceaProprietor,Alwaysa Proprietor Notthecaseatall! Ifyoureoperatingasaproprietor/partnership, youcanrollyourexistingbusinessintoa corporationonceyoureready.Thismayrequire somespecialtaxelectionstoavoidtriggering unintendedtaxonthetransfertothe @GregClarkeCA #shlearn corporation. Butwhenisthat??? 13. When to Incorporate?WhentoIncorporate? Generally when the business income is exceedingGenerallywhenthebusinessincomeisexceeding yourpersonalneeds Remember there is a cost to incorporation andRemember thereisacosttoincorporation and annualmaintenancecoststobeincurredof approximately $3 000 per yearapproximately$3,000peryear Asaresult,youneedtobeearningapproximately $20 000 or more than your personal needs to @GregClarkeCA #shlearn $20,000ormorethanyourpersonalneedsto offsettheannualcompliancecostofthe corporationcorporation 14. SmallBusinessDeduction Retaining funds in the business allows you toRetainingfundsinthebusinessallowsyouto earnarateofreturnonahigherprincipal balancethanifyoubonusordividendoutthe funds Aftertaxfundsincorporationis84.5%vs.p personalof53.5% differenceof31% Any investment income is taxed at 48% in the @GregClarkeCA #shlearn Anyinvestmentincomeistaxedat48%inthe corporation 15. CapitalGainExemptiononSmall BusinessShares This is an important tax break for businessThisisanimportanttaxbreakforbusiness owners Allows for each shareholder to realize a gain Allowsforeachshareholdertorealizeagain upto$800,000taxfree=savingsof$185,000 N d h h h lif f h Needtoensurethatthesharesqualifyforthe exemption @GregClarkeCA #shlearn 16. CapitalGainExemptiononSmall BusinessShares Rules: SharesmustbeofaCanadianControlled PrivateSmallBusinessCorporation At time of disposition 90% of the Attimeofdisposition,90%ofthe corporationsassetsaredirectlyusedinactive businesscarriedoninCanada Shareswereheldformorethan24months precedingdisposition with50%oftheassets @GregClarkeCA #shlearn usedinactivebusinessduringthatperiod 17. CapitalGainExemptiononSmall BusinessShares Need to ensure that the company does not Needtoensurethatthecompanydoesnot havesignificantexcessassetssuchas excessivecashorinvestmentsheldinit Excess capital and investments are at risk from Excesscapitalandinvestmentsareatriskfrom creditors @GregClarkeCA #shlearn 18. Problem?? Company retains profits and invests within theCompanyretainsprofitsandinvestswithinthe corporation.Eventuallythecompanywont meet the tests for the capital gain exemptionmeetthetestsforthecapitalgainexemption asinvestmentassetsbuildup Whatcanwedo??? @GregClarkeCA #shlearn 19. HoldingCompany Shareholder Payadividendupto theHoldingCompany andinvesttheassetsin theholdingcompany Holdco Dividend Stillhaveaproblem sincetheholding companydoesntgeta l @GregClarkeCA #shlearn capitalgainexemption OperatingCompany 20. WhattoDo? Use a Family Trust to own the operatingUseaFamilyTrusttoowntheoperating companyandhavetheholdingcompanyasa beneficiary of the Family TrustbeneficiaryoftheFamilyTrust Allowsyoutopayadividenduptotheholding company on a tax free basis for investmentcompanyonataxfreebasisforinvestment Ifthecompanyissold,thegainwouldoccurat h F il T l l @GregClarkeCA #shlearn theFamilyTrustlevel 21. FamilyTrustStructure The beneficiaries of the Trust include familyThebeneficiariesoftheTrustincludefamily members Beneficiaries over the age of 18 can receive a Beneficiariesovertheageof18canreceivea dividendtosplitincome A i h f i Assumingnoothersourcesofincome,a dividendof$49,000wouldbeessentiallytax f @GregClarkeCA #shlearn free 22. AdditionalBenefit FamilyTrust Structure Providesabilitytomultiplythecapitalgain exemption over several beneficiaries A typicalexemptionoverseveralbeneficiaries.Atypical familyoffourresultsinanoverallcapitalgain exemption of $3 200 000exemptionof$3,200,000 @GregClarkeCA #shlearn 23. FamilyTrustStructure BeneficiariesTrustee Corporate Family Trust Dividend Beneficiary Dividend @GregClarkeCA #shlearn OperatingCompany 24. Salaryvs.Dividends SalarySalary Resultsinataxdeductiontothecompany S d d ti ithh ld t Sourcedeductionswithheldonpayments Moreadministrationinvolved QualifiestobuildupRRSProom @GregClarkeCA #shlearn 25. Salaryvs.Dividends(contd) DividendsDividends Notataxdeductiontothecorporation Nosourcedeductionswithheldonpayments DoesnotqualifytobuildupRRSProom Moreexpensivethansalarysincethecorporation pays tax first and then the shareholder again @GregClarkeCA #shlearn paystaxfirstandthentheshareholderagain (approx23%higherthansalaryintotal) 26. Tax DeductionsTaxDeductions Vehicle Threeoptionsavailable: Deductthebusinessuseportionofyourvehicle expensesonyourpersonaltaxreturn. The company can reimburse you for business useThecompanycanreimburseyouforbusinessuse ofthevehiclevia i)aperkilometerrateor ii) thl ll ( t h t f lii)amonthlyallowance(watchoutforpersonal taxissues!) Thecompanycanownorleasethevehiclebut @GregClarkeCA #shlearn p y thisisataxablebenefittoyouforthepersonal useportionofthevehicleexpenses. 27. Tax DeductionsTaxDeductions HomeOffice Write off the business portion of your home Writeoffthebusinessportionofyourhome expensesagainstyourbusinessincome. Cant do this if you have a permanent office Can tdothisifyouhaveapermanentoffice spaceoutsideofthehouse. Golf DuesGolfDues Notdeductible @GregClarkeCA #shlearn 28. Meals&Entertainment Costs incurred for meals & entertainment areCostsincurredformeals&entertainmentare only50%deductibleforincometaxpurposes Only receive 50% for input tax credit for HSTOnlyreceive50%forinputtaxcreditforHST purposes Meals & entertainment for group functions (eg Meals&entertainmentforgroupfunctions(eg. Christmasparty)arefullydeductible Ensure you track your meals & entertainment @GregClarkeCA #shlearn Ensureyoutrackyourmeals&entertainment appropriately 29. LifeInsurance Consider holding life insurance as a corporateConsiderholdinglifeinsuranceasacorporate policywiththecorporation Life insurance payments are not tax deductible Lifeinsurancepaymentsarenottaxdeductible butpaymentswouldbefundedwithaftertax corporate dollars that have a greatercorporatedollarsthathaveagreater purchasingpowerthanpersonalfunds A i f d h d h li @GregClarkeCA #shlearn Attimeofdeath,proceedsonthepolicyare paidtothecorporation 30. LifeInsurance The insurance proceeds can be paid out as aTheinsuranceproceedscanbepaidoutasa capitaldividendtotheEstateofthe shareholder on a tax free basis if the propershareholderonataxfreebasisiftheproper electionisfiledwithCRAinadvanceofthe paymentpayment @GregClarkeCA #shlearn 31. SalestoU.S.Customers If you earn income from sales to the U S youIfyouearnincomefromsalestotheU.S.,you shouldfileaU.S.corporatetaxreturn If you don