Business Owners: Tax savings should be top of your resolution list

Happy New Year 2012 to everyone who is readying this blog. Today, I would like to share an excellent article from Tim Cesnick and published in The Globe & Mail. &&&&&&&&&& Tax savings should be top of your resolution list Once again it’s time for my annual New Year’s resolution. That’s right, a single resolution. This year, I’m getting into shape again. I’m going to start by eating slowly in 2012. It’s not about slowing my metabolism. It’s about my kids. They eat so much that if I slow down my pace of eating, there won’t be anything left by the time I’ve finished my salad. That’ll do it. What about you? If you’re still thinking about your New Year’s resolutions, consider adding tax savings to the list. If you make just one change to your affairs annually to save tax, you’ll do yourself a world of good in a short time. Consider one of these ideas: 1. Create self-employment earnings. Self-employment is still one of the greatest tax shelters available. Why? Deductions. Operating a part-time business from home is all you need to do. This can open the door to deducting a portion of those things you’re paying for anyway, such as mortgage interest, rent, property taxes, home insurance, home repairs, utilities, vehicle repairs, gas, auto insurance, interest on a car loan or lease payments, computer costs and more. 2. Pay family members a salary. If you have self-employment earnings you can move income into the hands of a family member who is in a lower tax bracket by paying wages or a salary for work performed. If you’re an employee, speak to your employer about requiring you to hire your own assistant for your work. Our tax law will allow an employee to deduct salary or wages paid to an assistant provided your employer required you to pay for one. Hiring your spouse or a child who is in a lower tax bracket will keep the money in the family and will save tax dollars. 3. Make your interest deductible. If you’re paying interest costs that are not deductible, and have some cash or investments on hand, consider doing a “debt swap” to create a deduction for your interest. You can do this by taking some of your cash, or selling some investments to create the cash, and using the cash to fully or partially pay down your non-deductible debt. You can then re-borrow to replace those investments or that cash. As long as the new debt is used for an income-producing purpose you should be entitled to deduct your interest costs. 4. Extract cash from your company tax-free. If you own a corporation, consider paying yourself capital dividends, repaying shareholder loans owing to you, and returning “paid up capital” to yourself to access the cash in your company tax-effectively. Also, consider claiming a refund of “refundable dividend tax on hand” (RDTOH) by paying yourself taxable dividends. All of this may sound like a foreign language, but a visit to a tax pro, perhaps your friendly chartered accountant, will help. 5. Consider a leave of absence or sabbatical. You can defer tax by setting aside some money in a deferred salary leave plan (DSLP). You can then take a leave of absence or sabbatical in a later year and collect your deferred salary at that time. Speak to your employer about setting up a DSLP. A DSLP must be in writing and meet certain criteria, such as: No more than one-third of your salary can be set aside for the leave, your leave must be at least six consecutive months, the leave must begin no later than six years after the salary deferral begins, and following the leave you must return to work for a period at least as long as the leave. There are other details that must be looked after as well, so your employer will need to seek advice on this. 6. Create pension income for the credit. If you have eligible pension income you’ll be entitled to claim the pension tax credit. If you and your spouse each claim the credit, this could fully or partially shelter the tax on $4,000 ($2,000 each) of pension income. It’s not going to make you wealthy, but it’s all part of building up tax savings year after year. You can create eligible pension income by, for example, converting part of your registered retirement savings plan to a registered retirement income fund to create $2,000 of RRIF income annually. You can also provide your spouse with eligible pension income by reporting up to half of certain pension income in his or her hands.