Today I would like to share an excellent article written by my good friend, Benoit Poliquin, CFA, and Portefolio Manager at Pallas Athena Investment Counsel located in Ottawa.
Why you should consider Individual Pension Plans
•You have faced many challenges of running a successful business or practice.
•Your ultimate challenge as an owner/manager will be to continue your business success into retirement.
•Individual Pension Plans, can become your very own defined pension plan - thus having more financial certainty.
IPPs for Business Owners
In a sentence...the answer is more retirement capital.
Are you thinking about retirement? If so, you are probably thinking about what you'll be doing in retirement. You are probably asking yourself (at least you should be!) how you will fund this retirement.
For successful business owners and professionals alike, the sale of your business may not be sufficient to fund your retirement. This is even especially the case if you are selling to family members, children or partners, where you could be asked to finance a considerable amount (all of?) purchase price.
Maybe your business won't be worth as much with you out of the picture? Have you considered this reality?
Perhaps you've made some great personal and financial sacrifices to ensure your venture' success. Take advantage of Individual Pension Plans and make up for "lost time".
So plan ahead! Have your current business set aside a retirement nest egg....just as if you worked for a large employer. Benefit from the same legislation, the same group of professionals like actuaries, investment managers and custodians to help you manage your future next egg.
What is an Individual Pension Plan?An individual pension plan (or IPP) is a defined benefit plan for owners of successful businesses.
What do we mean by defined benefit plans?
•The IPP is designed to ensure the beneficiary has a defined amount of capital at retirement.
How do I accumulate this retirement capital?
As in any pension plan, the capital accumulated comes from two sources: Investment Returns and Contributions.
The contributions are made by the sponsor of the IPP (the employer) and the returns are the fruit of the investments selected in the plan. Much like a conventional RRSP, you can invest in stocks, bonds and mutual funds.
There are three components of the Contributions . Past Service Contributions, Current Service Contributions and Future Service Contributions.
Contributions are based an actuarial calculations that takes into account your age, your years of service, investment returns of the plan assets and your salary. When you create an IPP, the employer/sponsor, can in many cases, make past service contributions (which is tax deductible for the employer!) into your IPP. Ongoing contributions are also tax deductible for the employer.
How do I know I should consider an IPP?
An IPP is a defined benefit plan for owners of successful businesses.
Here are the questions you should ask yourself. If you answer yes to ALL of these questions, then you should consider creating an Individual Pension Plan.
Questions:
1. Do you own, control (and in some cases manage) a profitable business?
2. Have you been employed by your current employer for at least five (5) years?
3. Are you over the age of 45?
4. Do you have taxable annual employment earnings(excluding dividends) of over $100,000?
for more information, click here
Tuesday, June 29, 2010
Friday, June 25, 2010
Business owners: 10 Tips for Planning Your Exit Strategy
As a business lawyer, my role is to help clients to either start, grow or sell their businesses. Lately, I came accross and excellent article in INC. magazine:
10 Tips for Planning Your Exit
Whether you're planning on selling your business, plotting the path toward taking your company public, or mulling the details of your succession planning, chances are Inc. has written about the experience. We've compiled tips gathered by our reporters from experts on making a smooth exit from your business – as well as a couple that exemplify what not to do when ducking out.
1. Know when to fold.
When first approached by Amazon, Zappos founder Tony Hsieh made clear his desire not to sell his online footwear sales company at any price. However, when conflicts within Zappos's board of directors led to lasting friction over the company's long-term goals, Hsieh started to reconsider the deal, he wrote. Finally, in 2009, a meeting with Amazon CEO Jeff Bezos turned fruitful – and Hsieh says he realized that selling might yield something better for the company than continuing to deal with an unsupportive board.
2. Watch out for your employees.
Until you sign on the dotted line, remember, it's still your company and they're still your employees. And you might end up keeping the whole shebang should negotiations not work out in the end, so you need to consider your workers' point of view. Norm Brodsky learned that by helping out in an attempted sale of a company he founded, CitiStorage. He wrote for Inc., "As educational as the entire process has been for me, it has taken a toll on the morale of my employees, especially my senior managers. They've endured three rounds of due diligence and watched a parade of potential buyers come through the company. Each group of strangers in suits served as a reminder of the uncertain future we faced. I could almost feel the anxiety level in the building rise whenever a new group showed up. Staff members couldn't help wondering whether they'd still have jobs after a sale. Inevitably, the rumor mill cranked up, and we began hearing disgruntled noises from some key people." So, Brodsky says, as different companies came around to talk, he made sure that potential buyers dealt exclusively with his partner and him.
CLICK HERE to read the article in INC's magazine.
10 Tips for Planning Your Exit
Whether you're planning on selling your business, plotting the path toward taking your company public, or mulling the details of your succession planning, chances are Inc. has written about the experience. We've compiled tips gathered by our reporters from experts on making a smooth exit from your business – as well as a couple that exemplify what not to do when ducking out.
1. Know when to fold.
When first approached by Amazon, Zappos founder Tony Hsieh made clear his desire not to sell his online footwear sales company at any price. However, when conflicts within Zappos's board of directors led to lasting friction over the company's long-term goals, Hsieh started to reconsider the deal, he wrote. Finally, in 2009, a meeting with Amazon CEO Jeff Bezos turned fruitful – and Hsieh says he realized that selling might yield something better for the company than continuing to deal with an unsupportive board.
2. Watch out for your employees.
Until you sign on the dotted line, remember, it's still your company and they're still your employees. And you might end up keeping the whole shebang should negotiations not work out in the end, so you need to consider your workers' point of view. Norm Brodsky learned that by helping out in an attempted sale of a company he founded, CitiStorage. He wrote for Inc., "As educational as the entire process has been for me, it has taken a toll on the morale of my employees, especially my senior managers. They've endured three rounds of due diligence and watched a parade of potential buyers come through the company. Each group of strangers in suits served as a reminder of the uncertain future we faced. I could almost feel the anxiety level in the building rise whenever a new group showed up. Staff members couldn't help wondering whether they'd still have jobs after a sale. Inevitably, the rumor mill cranked up, and we began hearing disgruntled noises from some key people." So, Brodsky says, as different companies came around to talk, he made sure that potential buyers dealt exclusively with his partner and him.
CLICK HERE to read the article in INC's magazine.
The biggest advantage of beeing a Canadian-Controlled Private Corporation (CCPC)
What is a CCPC?
As the name implies, a Canadian-controlled private corporation has to be private. It also has to meet all of the following conditions:
•it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
•it is not controlled directly or indirectly by one or more non-resident persons;
•it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
•it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
•it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
•if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
•no class of its shares of capital stock is listed on a designated stock exchange.
As the name implies, a Canadian-controlled private corporation has to be private. It also has to meet all of the following conditions:
•it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
•it is not controlled directly or indirectly by one or more non-resident persons;
•it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
•it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
•it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
•if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
•no class of its shares of capital stock is listed on a designated stock exchange.
The biggest corporate tax advantage of being a Canadian-controlled private corporation is being eligible for the small business deduction. This corporate tax deduction is calculated as 16.5% (as of January 1, 2010) of the least of a corporation's active business income, taxable income or business limit for the year. The small business deduction applies to the first $500,000 of active business income. Therefore, you company would only pay $16,500 on $100,000 of business income- on the other hand, and individual would pay $27,652 on the same $100,000 (fiscal year 2010 and Ontario resident)
Tuesday, June 22, 2010
Business Owners: Did you ever have a FREE Insurance Audit?
As a business lawyer, I am meeting a lot of entrepreneurs and I always suprised to see how many do not have proper insurance in place (life, critical illness, disability insurance, etc) -Especially when the corporation could pay for it, therefore it's a expense for the company. Today, I would like to share with you a great article from my good friend Milan Topolovec: Milan has more than 25 years of experience and he is providing a FREE Insurance audit for you and your partners - I highly recommend Milan, you only need to setup an appointment and he will review all your insurance policies for you ... in addition, you will have no further obligations. This 30 minutes can save you a lot money and could protect your family and yourself in case of ...
Have You Ever Had An Insurance Audit?
Each year, consumers spend billions of dollars on life insurance products, often needlessly. Many of these individuals could not tell you what type of coverage they have or the amount they pay in monthly premiums. Had they taken the amount they are paying in premiums and invested it, greater attention would have been paid.
We are often called upon to prepare insurance audits and create reports which show all the details of an insurance portfolio. Do you know the value of completing a detailed insurance audit?
Let me take you on a short journey where you will learn what can happen when things are left to chance.
Insurance audits provide you with peace of mind and provide your executors with a detailed summary of all your coverage. On occasion, we discover policies that are active but forgotten by the client. On one such occasion, monthly premiums were being withdrawn for policies no longer required. We were able to assist a client in saving well over $20,000. As the monthly withdrawals were spread over several policies, it remained undetected by the client. If this were a single lump sum, the client would have noticed.
When was the last time you reviewed the beneficiaries on your life policies? There have been documented cases where ex-spouses remained beneficiaries through oversight. In one corporation, the policy on death was being treated as a $10-million taxable benefit to the six shareholders. Ouch!
Recently we were called upon by an accounting firm to create an audit for one of their clients who happened to be a doctor. A number of problem areas were discovered which had nothing to do with amount or type of coverage. This client was using personal after-tax dollars, and through structural error, leaving the proceeds payable at claim to the professional services corporation.
There may be duplication of coverage where you are paying for coverage that you will never collect. Let's assume you have a disability program through your professional organization and a group plan. The coverage is offset at claim time.
Have you stopped smoking? If so, have you applied for NON-smoker rates? What is the difference of "own occupation" and "any occupation" in a disability policy? You say that the company owners have a shareholders' agreement and life insurance coverage. Who is the owner, premium payer and beneficiary on your policies?
You may feel overly secure in the fact that you have long term disability coverage under your group insurance plan. Group long term disability plans exhibit reverse discrimination against executives and shareholders. Show me a dedicated executive who would be able to stay home for 17 consecutive weeks in order to collect the payout under the LTD of a group policy.
Critical Illness and Long Term Care programs are the newest players in the life insurance arena.
Did you know that plans can be created where premiums are a tax-deductible expense to the corporation?
Operating Company, Holding Company, Family Trust or Spousal Trust can all be used to acquire tax-effective insurance solutions.
Work with an insurance professional that is experienced, deals with a number of leading insurers and also understands tax as well as legal structures.
To schedule a complimentary Insurance Audit, contact Catherine Pierre at ext. 231.
Milan Topolovec, BA, RHU, CLU. TEP is president and CEO of TK Group, recognized nationally as premier underwriters of insurance solutions from leading providers. Milan can be reached by e-mail at Milan@thetkgroup.com or by phone at ext. 223. For more information about TK Group visit http://www.thetkgroup.com/
Have You Ever Had An Insurance Audit?
Each year, consumers spend billions of dollars on life insurance products, often needlessly. Many of these individuals could not tell you what type of coverage they have or the amount they pay in monthly premiums. Had they taken the amount they are paying in premiums and invested it, greater attention would have been paid.
We are often called upon to prepare insurance audits and create reports which show all the details of an insurance portfolio. Do you know the value of completing a detailed insurance audit?
Let me take you on a short journey where you will learn what can happen when things are left to chance.
Insurance audits provide you with peace of mind and provide your executors with a detailed summary of all your coverage. On occasion, we discover policies that are active but forgotten by the client. On one such occasion, monthly premiums were being withdrawn for policies no longer required. We were able to assist a client in saving well over $20,000. As the monthly withdrawals were spread over several policies, it remained undetected by the client. If this were a single lump sum, the client would have noticed.
When was the last time you reviewed the beneficiaries on your life policies? There have been documented cases where ex-spouses remained beneficiaries through oversight. In one corporation, the policy on death was being treated as a $10-million taxable benefit to the six shareholders. Ouch!
Recently we were called upon by an accounting firm to create an audit for one of their clients who happened to be a doctor. A number of problem areas were discovered which had nothing to do with amount or type of coverage. This client was using personal after-tax dollars, and through structural error, leaving the proceeds payable at claim to the professional services corporation.
There may be duplication of coverage where you are paying for coverage that you will never collect. Let's assume you have a disability program through your professional organization and a group plan. The coverage is offset at claim time.
Have you stopped smoking? If so, have you applied for NON-smoker rates? What is the difference of "own occupation" and "any occupation" in a disability policy? You say that the company owners have a shareholders' agreement and life insurance coverage. Who is the owner, premium payer and beneficiary on your policies?
You may feel overly secure in the fact that you have long term disability coverage under your group insurance plan. Group long term disability plans exhibit reverse discrimination against executives and shareholders. Show me a dedicated executive who would be able to stay home for 17 consecutive weeks in order to collect the payout under the LTD of a group policy.
Critical Illness and Long Term Care programs are the newest players in the life insurance arena.
Did you know that plans can be created where premiums are a tax-deductible expense to the corporation?
Operating Company, Holding Company, Family Trust or Spousal Trust can all be used to acquire tax-effective insurance solutions.
Work with an insurance professional that is experienced, deals with a number of leading insurers and also understands tax as well as legal structures.
To schedule a complimentary Insurance Audit, contact Catherine Pierre at ext. 231.
Milan Topolovec, BA, RHU, CLU. TEP is president and CEO of TK Group, recognized nationally as premier underwriters of insurance solutions from leading providers. Milan can be reached by e-mail at Milan@thetkgroup.com or by phone at ext. 223. For more information about TK Group visit http://www.thetkgroup.com/
Tuesday, June 15, 2010
Business owners: Are you a candidate to setup a Family Trust?
As a business lawyer, I meet with entrepreneurs on a daily basis, and for many of them their most valuable asset is their corporation. For obvious reasons, their first priority is on income-earning activities, such as generating sales. Attention to such activities is, of course, a practical necessity and a hallmark of success. However, the utilization of a proper corporate structure to reduce tax exposure is often overlooked. Business owners must realize that a proper structure can save a substantial amount of taxes and can also be greatly beneficial for them and their family. The purpose of this article is to explain to you the benefits of using a Family Trust and to help you determine if you are a good candidate for implementing such a structure.
What is a Family Trust?
In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).
How do I determine if I’m a good candidate to setup a Family Trust?
Here are some key indicators that you should consider a Family Trust:
Ø You are shareholder in a private corporation.
Ø Your business is profitable and generating profits.
Ø You have children(s) and you are paying/will pay for their education(s).
Ø You may want to sell your company in the future.
Would it be beneficial for me and for my family?
Some of the benefits of using a Family Trust structure are:
Ø Funding of your children’s education. The first and immediate benefit is the funding of your children's education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 14% through the trust as opposed to funding your child's education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, you can save as much as 34% of taxes (i.e. a potential saving of $34,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.
Ø Income splitting. A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).
Ø Capital gains exemption. Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.
Ø Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.
As you can see, a Family Trust can offer business owners a great deal of flexibility and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional. For more personalized information regarding setting up a Family Trust contact me directly.
What is a Family Trust?
In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).
How do I determine if I’m a good candidate to setup a Family Trust?
Here are some key indicators that you should consider a Family Trust:
Ø You are shareholder in a private corporation.
Ø Your business is profitable and generating profits.
Ø You have children(s) and you are paying/will pay for their education(s).
Ø You may want to sell your company in the future.
Would it be beneficial for me and for my family?
Some of the benefits of using a Family Trust structure are:
Ø Funding of your children’s education. The first and immediate benefit is the funding of your children's education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 14% through the trust as opposed to funding your child's education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, you can save as much as 34% of taxes (i.e. a potential saving of $34,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.
Ø Income splitting. A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).
Ø Capital gains exemption. Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.
Ø Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.
As you can see, a Family Trust can offer business owners a great deal of flexibility and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional. For more personalized information regarding setting up a Family Trust contact me directly.
Thursday, June 10, 2010
Business Owners: are you looking for some government grants, loans and financing ...
Are you a business owners operating in Canada? if you are, I invite you to consult this website - you will be able to search in their database for several government grants, loans and financing.
Wednesday, June 9, 2010
Have you been to the Entrepreneurship Centre??
As you may know, I am a business partner with OCRI's Entrepreneurship Centre located in Ottawa, Ontario.
The Entrepreneurship Centre is an initiative of OCRI, dedicated to helping Ottawa entrepreneurs make informed decisions about starting and growing their businesses. The Centre aims to promote Ottawa's economy, through the development of products and services that encourage entrepreneurship and support business growth.
The Centre has a staff of dedicated business professionals, who provide advice and counsel to entrepreneurs on a variety of levels. As well, the Centre provides links to other business organizations, seminars and entrepreneurial events, online training and many other tools and resources to assist the budding entrepreneur.
A new program of the Entrepreneurship Centre, iProfit, has been designed to assist growth stage businesses reach goals and objectives through the help of selected mentors from the business community. The Centre works with each business individually in crafting a personalized mentoring program. Once business applicants are screened and accepted, a mentor is provided to work through selected issues. A unique feature of iProfit is the online portal where mentor- business and Entrepreneurship Centre business advisor- can work and collaborate in a secure, efficient envirornment- thus saving time and creating an effective tool in moving along issues and solving critical, time sensitive concerns.
I recommend to new clients to consult their website and to contact the Centre,, they provide useful informations for entrepreneurs.
click here to learn more.
The Entrepreneurship Centre is an initiative of OCRI, dedicated to helping Ottawa entrepreneurs make informed decisions about starting and growing their businesses. The Centre aims to promote Ottawa's economy, through the development of products and services that encourage entrepreneurship and support business growth.
The Centre has a staff of dedicated business professionals, who provide advice and counsel to entrepreneurs on a variety of levels. As well, the Centre provides links to other business organizations, seminars and entrepreneurial events, online training and many other tools and resources to assist the budding entrepreneur.
A new program of the Entrepreneurship Centre, iProfit, has been designed to assist growth stage businesses reach goals and objectives through the help of selected mentors from the business community. The Centre works with each business individually in crafting a personalized mentoring program. Once business applicants are screened and accepted, a mentor is provided to work through selected issues. A unique feature of iProfit is the online portal where mentor- business and Entrepreneurship Centre business advisor- can work and collaborate in a secure, efficient envirornment- thus saving time and creating an effective tool in moving along issues and solving critical, time sensitive concerns.
I recommend to new clients to consult their website and to contact the Centre,, they provide useful informations for entrepreneurs.
click here to learn more.
Monday, June 7, 2010
Entrepreneurs: Do you have a proper share structure??
For those who are about to incorporate and have yet to do so, it is important you give appropriate consideration to establishing a proper share structure. In doing so you will likely save time, money and administrative difficulties as your business grows. While you are only required, in law, to have one class of shares (common), it is best to provide additional classes of shares so that you will have the needed flexibility in the future to attract new investors; to afford an opportunity of income splitting between family members; and possibly to make use of a family trust. Ultimately, if truly successful, you will also be in a position to take advantage of significant tax savings if the appropriate classes of shares have been in existence and have been held by the shareholders for a sufficient period of time (2 years).
Putting in place the correct share structure provides a number of advantages:
- Income Splitting - This can be an effective tax saving device if you and your spouse hold different classes of shares. This affords you an opportunity to issue dividends and/or bonuses in a tax efficient manner.
- Key Employees - Issuing shares to key employees can promote and maintain loyalty to ensure ongoing involvement of top level employees. The shares to be offered to key employees can either be voting or non-voting common shares or voting or non-voting special shares so long as such shares are part of the share structure.
- Family Trusts - The use of family trusts and the issuing of the appropriate shares to beneficiaries of the family trust can be an effective tax and succession planning device.
- Succession Planning - With the appropriate share structure in place it is possible to establish a cost effective and tax effective succession regime.
- Raising Investment Capital - While it is common that an investor will have certain requirements concerning the share structure, it is possible to envisage many, if not all such requirement in advance and this may facilitate a successful due diligence process.
- Administrative and Legal Fees - Establishing an appropriate share structure at the outset can avoid the time and expense of preparing needed Articles of Amendment in the future.
Business owners: How can you take out $32,000 Tax Free from your business??
Several clients asked me to blog about the different ways of extracting money from their companies - Today I will only explain you one technique to take out cash from your business:
Let's take John, a consultant, incorporated under the name John Doe Inc. The company is making aobut 200k of net profit per year - the Corporation will then pay roughly about 17% of corporate tax (CCPC - Ontario, fiscal year 2010)- Hence the retained earning (money who can be distributed to shareholder(s) is about $166,000 (200k - 17%of taxes). Let's say that John is the sole shareholder of is corporation, John will then have 3 options - he will either take a salary, declare a dividend to himself, a mix of both or he will let a portion of the profit in it's company as retained earnings....
Let’s make it a little bit more complicated, John got married last year with Julie and they are planning to have a baby next year. Then Julie will stop working for 3-4 year to raise the kid.
Did you know that while staying home, Julie could receive up to $32,000 TAX FREE…
How is that possible? Well, trough a series of legal and accountant transactions (namely an estate freeze - S.86 Income Tax Act) Julie would then acquire shares in John’s company and John would be able to issue her a dividend … The first $32,000 would be non-taxable for Julie if she qualify under the different conditions of the Act - (email me to know more about these conditions...)
The important part to know is that If an individual does not have any other source of revenues, a shareholder can receive up to $32,000 Tax Free.
As usual, I strongly suggest you consult your own professional advisor before proceeding with an estate freeze.Too good to be true ?? Contact me and I will explain how we can change your corporate structure to ensure that you save taxes!!
Let's take John, a consultant, incorporated under the name John Doe Inc. The company is making aobut 200k of net profit per year - the Corporation will then pay roughly about 17% of corporate tax (CCPC - Ontario, fiscal year 2010)- Hence the retained earning (money who can be distributed to shareholder(s) is about $166,000 (200k - 17%of taxes). Let's say that John is the sole shareholder of is corporation, John will then have 3 options - he will either take a salary, declare a dividend to himself, a mix of both or he will let a portion of the profit in it's company as retained earnings....
Let’s make it a little bit more complicated, John got married last year with Julie and they are planning to have a baby next year. Then Julie will stop working for 3-4 year to raise the kid.
Did you know that while staying home, Julie could receive up to $32,000 TAX FREE…
How is that possible? Well, trough a series of legal and accountant transactions (namely an estate freeze - S.86 Income Tax Act) Julie would then acquire shares in John’s company and John would be able to issue her a dividend … The first $32,000 would be non-taxable for Julie if she qualify under the different conditions of the Act - (email me to know more about these conditions...)
The important part to know is that If an individual does not have any other source of revenues, a shareholder can receive up to $32,000 Tax Free.
As usual, I strongly suggest you consult your own professional advisor before proceeding with an estate freeze.Too good to be true ?? Contact me and I will explain how we can change your corporate structure to ensure that you save taxes!!
Exemption from the Audit requirement under the CBCA and BCA (Ontario)
As you might be aware, Under the Canadian Business Corporations Act ("CBCA") and the Business Corporations Act it is possible to waive the audit requirements. For SME's (small & medium entreprises) it can be costly to have audited financial statements (minimum $5000- $7,500 up to $100,000 and more...) Therefore, it's possible to pass a annual resolutation to waive the obligation of appointing an auditor. The resolution MUST be signed by ALL the shareholders of the corporation (please see below for the listed conditions). Further, Please ensure that you review your minute book and that you have a resolution for EACH year since the incorporation date of your business. Once you have your annual resolution signed by all the shareholders, it will give you the options of getting notice to reader statements or engagement review, these 2 options are cheaper.
Here are the proper sections of each Act (federal and provincial):
Canada Business Corporations Act ( R.S., 1985, c. C-44 )
Dispensing with auditor
163. (1) The shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor.
Limitation
(2) A resolution under subsection (1) is valid only until the next succeeding annual meeting of shareholders.
Unanimous consent
(3) A resolution under subsection (1) is not valid unless it is consented to by all the shareholders, including shareholders not otherwise entitled to vote.
Business Corporations Act
148 . In respect of a financial year of a corporation, the corporation is exempt from the requirements of this Part regarding the appointment and duties of an auditor if,
(a) the corporation is not an offering corporation; and
(b) all of the shareholders consent in writing to the exemption in respect of that year. 1998, c. 18, Sched. E, s. 23.
Here are the proper sections of each Act (federal and provincial):
Canada Business Corporations Act ( R.S., 1985, c. C-44 )
Dispensing with auditor
163. (1) The shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor.
Limitation
(2) A resolution under subsection (1) is valid only until the next succeeding annual meeting of shareholders.
Unanimous consent
(3) A resolution under subsection (1) is not valid unless it is consented to by all the shareholders, including shareholders not otherwise entitled to vote.
Business Corporations Act
148 . In respect of a financial year of a corporation, the corporation is exempt from the requirements of this Part regarding the appointment and duties of an auditor if,
(a) the corporation is not an offering corporation; and
(b) all of the shareholders consent in writing to the exemption in respect of that year. 1998, c. 18, Sched. E, s. 23.
Top 10 reasons why your company needs a Shareholders’ Agreement
As mentioned before, a shareholders’ agreement is an important and very helpful document when setting up a business, or when acquiring partial interest in a business. It sets out the privileges and responsibilities of the shareholders, and provides a means for setting out the principles upon which the shareholders intend to run the business and deal with unforeseen circumstance and contingencies. In other words, a shareholders’ agreement defines the way in which the company should be governed and managed so as to avoid messy and expensive disputes in the future. Therefore, companies should have a shareholders’ agreement for ten main reasons.
Top 10 reasons why your company needs a Shareholders’ Agreement
Reason #1: Provides a customized relationship between shareholders and directors
Corporations often want to customize their relationship to create an arrangement which differs from the applicable corporate legislation, including shareholder voting entitlements, imposing share-transfer requirements, and providing for a dispute-settlement mechanism.
Reason #2: Voting entitlements
Shareholders in a corporation may want to exercise their power to vote on a basis different from the votes they have according to their share ownership. For example, it may be essential to provide for how the shareholders are to nominate and elect the directors.
Reason #3: The possibility of imposing share-transfers
The general rule is that no shares may be transferred without prior approval of the directors. This rule protects the shareholders from ending up in a business relationship with parties who are different from those initially agreed upon. Consequently, if not supplemented by other provisions, a shareholder that wishes to exit needs to obtain prior approval from the other shareholders and there is no assurance that such approval will be imminent. It is therefore vital to provide a predetermined method for transferring shares.
Reason #4: Preventing conflict between the shareholders by providing conflict-resolution methods.
Different forms of dispute-settlement methods, such as mediation or arbitration, are often included in shareholders’ agreements to avoid going to court to resolve such disputes.
Reason #5: Transferring of power
Shareholders’ agreements permit altering the distribution of power between directors and shareholders. Basically, it can restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs for the corporation, and provide a greater degree of power to the shareholders.
Reason #6: Future shareholders
It is common in shareholders’ agreements to stipulate that all transfers and share issuances are conditional upon any new shareholder signing the agreement. Please note: this is not required if there is a unanimous shareholders agreement.
Reason #7: Addressing the quorum and other minimum requirements for director and shareholder meetings
It is important to address the minimum number of members necessary to carry out the business of the corporation.
Reason #8: Issues relating to the finances of the company
Shareholders may wish to regulate the distribution of the corporation’s profits in some manner. It may also be imperative to set out the relevant terms of debt financing in the shareholders’ agreement.
Reason #9: Potential inconvenience
A corporation can anticipate future situations and therefore a shareholders’ agreement can lay out possible solutions for potential problems such as deadlocks.
Reason #10: Impact of other agreements
Some shareholders are party to other agreements with respect to the corporation. The shareholders’ agreement may provide information on what to do if a shareholder breaches that other agreement.
The lawyer’s role in preparing this agreement requires him/her to learn as much as possible about the client’s objectives, needs, and fears. This information mentioned above is incorporated into the agreement in order to ensure that each agreement is designed to fit the unique needs and circumstances of each client.
Top 10 reasons why your company needs a Shareholders’ Agreement
Reason #1: Provides a customized relationship between shareholders and directors
Corporations often want to customize their relationship to create an arrangement which differs from the applicable corporate legislation, including shareholder voting entitlements, imposing share-transfer requirements, and providing for a dispute-settlement mechanism.
Reason #2: Voting entitlements
Shareholders in a corporation may want to exercise their power to vote on a basis different from the votes they have according to their share ownership. For example, it may be essential to provide for how the shareholders are to nominate and elect the directors.
Reason #3: The possibility of imposing share-transfers
The general rule is that no shares may be transferred without prior approval of the directors. This rule protects the shareholders from ending up in a business relationship with parties who are different from those initially agreed upon. Consequently, if not supplemented by other provisions, a shareholder that wishes to exit needs to obtain prior approval from the other shareholders and there is no assurance that such approval will be imminent. It is therefore vital to provide a predetermined method for transferring shares.
Reason #4: Preventing conflict between the shareholders by providing conflict-resolution methods.
Different forms of dispute-settlement methods, such as mediation or arbitration, are often included in shareholders’ agreements to avoid going to court to resolve such disputes.
Reason #5: Transferring of power
Shareholders’ agreements permit altering the distribution of power between directors and shareholders. Basically, it can restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs for the corporation, and provide a greater degree of power to the shareholders.
Reason #6: Future shareholders
It is common in shareholders’ agreements to stipulate that all transfers and share issuances are conditional upon any new shareholder signing the agreement. Please note: this is not required if there is a unanimous shareholders agreement.
Reason #7: Addressing the quorum and other minimum requirements for director and shareholder meetings
It is important to address the minimum number of members necessary to carry out the business of the corporation.
Reason #8: Issues relating to the finances of the company
Shareholders may wish to regulate the distribution of the corporation’s profits in some manner. It may also be imperative to set out the relevant terms of debt financing in the shareholders’ agreement.
Reason #9: Potential inconvenience
A corporation can anticipate future situations and therefore a shareholders’ agreement can lay out possible solutions for potential problems such as deadlocks.
Reason #10: Impact of other agreements
Some shareholders are party to other agreements with respect to the corporation. The shareholders’ agreement may provide information on what to do if a shareholder breaches that other agreement.
The lawyer’s role in preparing this agreement requires him/her to learn as much as possible about the client’s objectives, needs, and fears. This information mentioned above is incorporated into the agreement in order to ensure that each agreement is designed to fit the unique needs and circumstances of each client.
Tuesday, June 1, 2010
TAX PLANNING CHECKLIST FOR THE OWNER - MANAGER
Today I would like to share an excellent article written by Tom Zaks - the above will give you some tax planning tips.
The following represents a tax-planning checklist for individuals that have their own incorporated private Canadian active business. Due to the complexity of tax laws related to private Canadian corporations as well as every corporation and owner-manager having different facts and circumstances, it is imperative that qualified tax and/or legal advisors be consulted with before taking any action based on the strategies below. Note that this is not an exhaustive list. Tax season is upon us and there are certain considerations every business owner should keep in mind from a tax perspective.
1) Ensure a legally binding shareholder's agreement is in place. Among other things a shareholder agreement can help to ensure an orderly manner for settling shareholder disputes; can set restrictions on selling shares to third parties; can provide a framework for the purchase of the shares of a deceased shareholder; competition clauses, etc.;
2) Consider employing lower income family members and pay them a salary that is reasonable based on the services they are performing (the salary will create RSP contribution room and generate CPP/QPP pensionable earnings);
3) Consider paying dividends from corporate earnings to spouses and adult children shareholders. Canadian dividends are taxed lower than salary (however, dividends will not create RSP contribution room or CPP/ QPP pensionable earnings). Also, unlike salary, dividend payments do not have to be tied to the amount of services performed in the business. Dividends paid out to benefit related minor children are taxed at the highest marginal tax rate under the "kiddie tax" rules;
4) Consider the pros and cons of an estate freeze so that the capital gain on the future growth of the business is deferred and attributed to the next generation, but the control of the business can remain with the parents. This may also allow for use of the $750,000 capital gains exemption by other family members;
5) In certain circumstances, consider setting up an RCA or IPP to increase the retirement savings of the ownermanager and lower the tax burden of the corporation;
Consider corporate owned life insurance as a low cost solution for funding buy-sell agreements, funding tax liabilities, key person protection, sheltering tax on surplus investment income, etc;
6) Use corporate funds to make the RSP contribution for the owner-manager. 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;
7) If possible, pay bonuses to employees to reduce the company's taxable income to $500,000, since the first $500,000 of small business active income is taxed at low tax rates (17% - 22%);
8) Consider deferring employee bonuses up to 179 days after the 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 though will declare the bonus in the year of receipt, which in certain cases may lower the tax liability for the employee on the bonus (however, withholding tax will continue to apply on the bonus);
8) As an alternative to large bonus payments, consider making the payments to an Employee Profit Sharing Plan (EPSP). The corporation receives a tax deduction for EPSP contributions.
*** Tom Zaks, B.Comm,CFP is the author of the books "The Business Owner's Guide to Wealth Management" and "Financial Planning for the Canadian Business Owner". He is an Investment Advisor with RBC Dominion Securities in Mississauga, Ontario
The following represents a tax-planning checklist for individuals that have their own incorporated private Canadian active business. Due to the complexity of tax laws related to private Canadian corporations as well as every corporation and owner-manager having different facts and circumstances, it is imperative that qualified tax and/or legal advisors be consulted with before taking any action based on the strategies below. Note that this is not an exhaustive list. Tax season is upon us and there are certain considerations every business owner should keep in mind from a tax perspective.
1) Ensure a legally binding shareholder's agreement is in place. Among other things a shareholder agreement can help to ensure an orderly manner for settling shareholder disputes; can set restrictions on selling shares to third parties; can provide a framework for the purchase of the shares of a deceased shareholder; competition clauses, etc.;
2) Consider employing lower income family members and pay them a salary that is reasonable based on the services they are performing (the salary will create RSP contribution room and generate CPP/QPP pensionable earnings);
3) Consider paying dividends from corporate earnings to spouses and adult children shareholders. Canadian dividends are taxed lower than salary (however, dividends will not create RSP contribution room or CPP/ QPP pensionable earnings). Also, unlike salary, dividend payments do not have to be tied to the amount of services performed in the business. Dividends paid out to benefit related minor children are taxed at the highest marginal tax rate under the "kiddie tax" rules;
4) Consider the pros and cons of an estate freeze so that the capital gain on the future growth of the business is deferred and attributed to the next generation, but the control of the business can remain with the parents. This may also allow for use of the $750,000 capital gains exemption by other family members;
5) In certain circumstances, consider setting up an RCA or IPP to increase the retirement savings of the ownermanager and lower the tax burden of the corporation;
Consider corporate owned life insurance as a low cost solution for funding buy-sell agreements, funding tax liabilities, key person protection, sheltering tax on surplus investment income, etc;
6) Use corporate funds to make the RSP contribution for the owner-manager. 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;
7) If possible, pay bonuses to employees to reduce the company's taxable income to $500,000, since the first $500,000 of small business active income is taxed at low tax rates (17% - 22%);
8) Consider deferring employee bonuses up to 179 days after the 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 though will declare the bonus in the year of receipt, which in certain cases may lower the tax liability for the employee on the bonus (however, withholding tax will continue to apply on the bonus);
8) As an alternative to large bonus payments, consider making the payments to an Employee Profit Sharing Plan (EPSP). The corporation receives a tax deduction for EPSP contributions.
*** Tom Zaks, B.Comm,CFP is the author of the books "The Business Owner's Guide to Wealth Management" and "Financial Planning for the Canadian Business Owner". He is an Investment Advisor with RBC Dominion Securities in Mississauga, Ontario
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