Many business owners have substantial personal assets invested in their business. This can have significant implications, not only for you and your business, but also for your family’s financial security.
To protect your investment, both business and personal, your business strategy should include carefully structured tax-planning components to ensure you have organized your assets in the most tax-effective manner and utilized the tax-planning strategies available to you.
Personal tax planning – There are several income-splitting strategies available to owners of private corporations in Canada that may benefit you and your family. They include:
Income splitting by paying a salary to family members: Consider income splitting with lower-income family members by employing them in the corporation and paying them a reasonable salary based on the services they perform. The salary they receive will also create Retirement Savings Plan (RSP) contribution room for them and generate CPP/QPP pensionable earnings.
Income splitting by paying dividends to adult family members: If you have an active corporation, you may be able to transfer some, or all, of the future growth of the business to the next generation of your family using an estate freeze with a family trust.
Multiplying the capital gains exemption: It is possible to multiply the capital gains exemption available to you and your family on the sale of the qualifying shares of your business. This could significantly increase the family’s after-tax assets following the sale. One way to do this is by having your operating company owned by a family trust with your family members as beneficiaries of the trust. When you sell the qualifying shares owned by the trust, the resulting capital gains can be allocated to each beneficiary and they can each claim their capital gains exemption.
Tax planning for your business – If you’re the owner of a private Canadian corporation earning active business income, consider whether the following strategies would work for your business: Maintain the status of your corporation as a qualifying small-business corporation: By maintaining your operating company’s status as a qualifying small business corporation (QSBC), when you eventually sell its shares you may be able to take advantage of the capital gains exemption. This exemption, currently $750,000, is available to individual shareholders of active Canadian private corporations and can represent a sizable tax saving.
Earning Canadian dividend income in a corporation: Canadian source dividends from corporations that are not controlled by the shareholder corporation are subject to a flat refundable corporate tax of 33.3 per cent. If you are earning Canadian public company dividends in a corporation, then consider paying out an amount equal to the dividend in the same year to avoid prepaying this higher corporate tax compared to the lower tax rate on eligible dividends if earned personally.
Life insurance as a tax-exempt investment in the corporation: If you have surplus funds accumulating in your corporation, you may be taxed at a higher rate on the investment income earned in the corporation than if you earned it personally. You may also face double taxation on the assets within the corporation on death. Tax planning solutions are available that may help you address this problem.
Kirbey Lockart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.