Tax tips for small business
As an owner-manager of an incorporated business, you have several opportunities to minimize taxes.
Following are just a few of the strategies that can potentially reduce your tax bill if you own an incorporated active private Canadian business.
Minimize taxes with your family – Employ lower-income family members and pay them a salary that is reasonable based on the services they are performing. The income received by the family member will be taxed at a lower rate.
Pay dividends from corporate earnings to spouses and adult children shareholders – Canadian dividends are taxed lower than salary income (however they will not create RSP contribution room or CPP/QPP pensionable earnings). Dividends paid out to benefit related minor children are taxed at the highest marginal tax rate under the “kiddie tax” rules.
Loan corporate funds to adult children for education costs – The loan is considered taxable income to the adult child, however the tax payable on this income may be very low or even nil due to the child’s basic, tuition and education tax credits. When the adult child repays the loan to the corporation in a future year when the adult child is earning income, the adult child will receive a personal tax deduction.
Consider an estate freeze so that the capital gain on the future growth of your business is deferred and attributed to the next generation, but control of the business remains with you. This may also allow for use of the capital gains exemption by other family members.
Reduce taxes while planning for retirement – Set up a retirement compensation arrangement (RCA) or individual pension plan (IPP) to increase your retirement savings, while lowering your corporation’s tax burden.
Use corporate funds to make contributions to your Retirement Savings Plan (RSP) – The cash used to make the RSP contribution will be considered employment income (reported on the T4 and thus will create future RSP contribution room), but the offsetting RSP deduction will avoid taxation on the increased salary. Payroll deductions may be required on the amounts used to make the RSP contribution. These amounts may result in a lower tax owing, or a larger refund when a personal tax return is filed.
Use insurance to shelter taxes – Corporate-owned life insurance can help fund buy-sell agreements, tax liabilities, and key person insurance, as well as shelter tax on surplus investment income.
Pay bonuses to get into a lower tax rate – If possible, pay bonuses to employees to reduce the company’s taxable income to $500,000 since the first $500,000 ($400,000 in Manitoba and Nova Scotia) of small business active income (2011 value) is taxed at low tax rates (11-19 per cent, depending on the province).
Consider deferring employee bonuses up to 179 days after corporate year-end – The company will get a tax deduction in the current corporate tax year but does not have to pay the bonus in the current year. The employee will declare the bonus in the year of receipt, which in certain cases may lower the tax liability for the employee on the bonus (withholding tax will continue to apply on the bonus).
Kirbey Lockhart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Consult with a professional advisor before implementing a strategy.