Today, I would like to share a great article written by Tim Cestnick. Tim is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
HOLDING COMPANY
This summer when you're standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning.
I can tell you from experience that you'll bore them to tears with the conversation, but they'll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.
THE RULES
If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax.
How? By establishing a holding company to own the shares of your active business corporation (ABC).
You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends.
If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.
It's subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are "connected" under our tax law (which will be the case in the vast majority of situations), you'll avoid another tax called the Part Four tax.
By passing some of those earnings from your ABC to your holding company, you'll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus.
The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.
THE STRATEGIES
What strategies should you be thinking about?
Multiple shareholders: If you're one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you.
Think of each holding company as a tap to control the payment of dividends to each of you personally.
Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.
Splitting income: Your holding company can be owned by more than one person in the family.
Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared.
It's not always advisable to issue shares in the holding company directly to your children (and if they're minors, this isn't possible), and so a family trust can be utilized, which brings me to the next strategy.
Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust.
The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company.
Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you'll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are "connected."
The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.
Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.
Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or "pension" that you will need to look after yourself during retirement.
As usual, please do not hesitate to contact me to discuss the above.
Wednesday, July 7, 2010
Tuesday, June 29, 2010
Business owners: Why you should consider Individual Pension Plans.
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
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
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/
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