A family trust for small business pays dividends for tuition *

In previous entries, I mentionned several times the use of family trust for business owners. For almost every clients, I suggest the use of said Family trust, it is a great way of saving taxes. Today, I would like to share with you an excellent article from Tim Cestnick from the Globe and Mail, explaining clairly the advantages of using different trusts. If you have any questions regarding the same, please do not hesitate to email me.


A family trust for small business pays dividends for tuition

Every few months my extended family gets together to visit. It's a chance to get caught up with my aunts, uncles and cousins. My cousin Erik didn't make it to our last get-together.

Erik is something of a permanent student. He's got more degrees than the thermometer outside our kitchen window.

"Uncle Ron, how's Erik doing?" I ask.

"He's just fine, Tim. He's back at university this month."

"Still?" I reply. "I thought he finished last year. What's Erik going to be when he graduates?"
"A very old man," he replies.

At this point, Erik is paying for his own education. But if you're looking to help your kids with the cost of postsecondary education, and you're a business owner, consider a family trust. Let me explain.

The trust

This idea is best understood by an example. Consider Scott. Scott has three children, all in their teens. University is just around the corner for them and it won't be cheap -- about $16,000 each year, everything included.

Scott runs a business that has sufficient cash flow to help pay for the education of his kids. One option for Scott is to pay himself additional salary from his company to help cover the cost of university when that time comes. Since Scott is in the highest marginal tax bracket, he'll pay tax of about 46 per cent (varies by province) on those dollars. So, a $10,000 payment from his company in this case will leave just $5,400 to help cover the costs of education.

There may be a better option. Scott could structure the ownership of his company so that some of the common shares of the company are owned by a family trust. Then, the company could pay dividends to the trust annually for each child once they're 18 and are attending university or college.

The dividends could then be paid out of the trust to each child to help pay for school. The results? Scott's company will pay tax of about 18 per cent (again, varies by province) on its active business income below $400,000.

The dividends paid to the trust and then out to Scott's kids will not be taxed in the trust, and will face little or no tax in the kids' hands if they have little or no other income. In fact, each child could receive about $32,000 (varies by province) in cash dividends annually and pay little or no tax if he or she had no other income. This total tax cost of about 18 per cent is much less than the 46-per-cent tax cost of paying additional salary to Scott.

Other thoughts

Now, there are rules in Canadian tax law that will make this strategy less effective if you pay dividends directly or indirectly through a trust to a child under 18. These "kiddie tax" rules will cause tax at the highest marginal tax rate on those dividends. But the idea works well for kids 18 or older.

In addition, there are some other benefits to the trust strategy. If you expect the value of your business to grow in the future, you may be able to shelter part of that growth from tax using the $750,000 capital gains exemption of each of your children who is a beneficiary of the trust. The trust will also protect the assets in the trust from any creditors or future spouses of your kids. Finally, those dividends paid out of the trust could be used for any purpose -- not just education.

* written by Tim Cestnick - Tim is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles. This article was published in the Globe and Mail on September 28, 2006 and was slighty edited to reflect accurate numbers.

How to keep records - Requirements of Canada Revenu Agency (CRA)

How to keep records

You are responsible for keeping records if you are carrying on a business or engaged in a commercial activity in Canada.

Requirements

Your records whether in paper or electronic format, have to:

a) be reliable and complete;

b) provide you with the correct information you need to assist in fulfilling your tax obligations and to calculate your entitlements;

c) be supported by source documents to verify the information contained in the records;

d) and include other documents, such as appointment books, logbooks, income tax and goods and services tax/harmonized sales tax (GST/HST) returns, scientific research and experimental development (SR&ED) vouchers and records, and certain accountants' working papers, that assist in determining your obligations and entitlements.

* Note: Persons carrying on more than one business must keep separate records for each business.

Retention and destruction

You have to keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years.

This six-year period starts at the end of the tax year to which the records relate. The tax year is the fiscal period for corporations and the calendar year for all other taxpayers.

Records and supporting documents concerning long-term acquisitions and disposal of property, the share registry, and other historical information that would have an impact upon sale or liquidation or wind-up of the business must be kept indefinitely.

Location of records

Your records must be kept at your place of business or at your residence in Canada, unless CRAgive you permission to maintain them elsewhere. To request permission, write to your tax services office.

* Note: CRA may require you to keep records for an additional period of time. If this is the case, you will receive details by registered letter or by a demand served personally by one of their representatives.

For more info - visit CRA's Website

Sometimes Less (Revenue) Is More...

here is a great Q & A from Norm Brodsky from INC, magazine. READ IT AND THINK ABOUT IT AND PLEASE PROVIDE ME WITH YOUR COMMENTS ABOUT THIS ANSWER....

Sometimes Less (Revenue) Is More

QUESTION:

Norm, My home-based design business sells store fixtures and related equipment to the retailers we work with. I try to operate on a 25% to 30% gross margin, but I don't know if that's appropriate. I always wonder how much more revenue we could get if we charged less.--Norbert

ANSWER

Norbert, You're wondering about the wrong thing. You should be asking yourself how much less revenue you'd get if you charged more. Gross- and net-profit lines are far more important than sales. I'd greatly prefer to have $20,000 in gross profit on $50,000 in sales than to have the same gross profit on $100,000 in sales. Why? Because I'd have fewer headaches, fewer shipments, fewer people, and on and on. If I were you, I'd look for ways to increase your margins, not reduce them. Maybe you can get better deals on the products. Maybe you can cut your shipping prices, but I wouldn't do it unless you're certain that you'll get the additional sales—and that they'll be worth it.--Norm

YBN-NC Breakfast Speaker Series – August 20th

My group, The Young Business Network of the National Capital is pleased to invite you to the fifth breakfast of the YBN-NC Breakfast Speaker Series. It will take place on Wednesday, August 20th, at 7:00 am, at Cora’s Breakfast and Lunch restaurant on Rideau Street (corner of Rideau and Dalhousie). Our guest speaker for the breakfast will be Mike Caldwell, and in his presentation “V.E.A.R Toward Success”, Mike shares the examples and the methods he used to achieve success in a multitude of arenas.Mike holds a Master of Science in Management degree. In his career, he was hired to start up and activate Ontario's current air ambulance helicopter system. Athletically, Mike has completed 2 Ironman triathlons and 2 Keskinada 54km Ski Loppets. In the realm of volunteer services he spent 3 months in Guyana doing community service. For travel he has guided whitewater rafts throughout the Rocky Mountains, the Canadian Arctic and the French Alps. Most recently, Mike has single handedly turned an abandoned 6,000 square foot sawmill into an off-the-grid home and conference center. Mike's motto is "If it can be done, it can be done by me" and his message is, if he can do it, so can you!
This is a down-to-earth presentation which will definitely inspire and motivate you.

To register, please send an email to philip.brock@NBPCD.com