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