The ever-changing technology field has resulted in tremendous opportunity, growth and profitability for business owners quick to identify and meet marketplace demands.
Fundamental to financial success is maximizing profit and minimizing operating expenses. Yet equally important, is managing your after-tax cash flow through smart tax planning to ensure you take full advantage of the tools available. Here’s a sample of the tax areas that should be reviewed to maximize profits:
Corporate Taxes
For 2014, corporate tax rates remain unchanged, calculated at 15.5% of the first $500,000 of associated company income and 26.0% on any remaining balance of income. If your corporate income is above $500,000, then there may be opportunities to restructure the operations to use multiple companies to reduce the corporate tax burden.
Personal Income Taxes
There are many tax planning options that can be considered. Although some options are more complex, the tax advantage can be significant:
- Tax Integration– our tax system considers the integration of taxation involving corporations and individuals. Some business owners receive a salary from their companies, others may take dividends and some may be a mix of both salary and dividends. Due to increases in the dividend tax rates for 2014, it is important to review your compensation strategy early to determine the best compensation strategy and avoid paying too much in tax.
- Registered Retirement Savings Plans – make your RRSP contributions early in 2014 (rather than February 2015), the long-term power of investment compounding is significant. Your contribution limit for 2014 is noted by CRA on your 2013 notice of assessment.
- Tax-free Savings Account – ensure you have TFSA in place for all family members, the maximum contribution for 2014 is $5,500 and the cumulative limit since inception is now $31,000.
- Registered Education Savings Plan – consider contributing the standard $ 2,500 for each eligible child now, this will generate the standard government grant of $500.
- Individual Pension Plans (IPP) – consider the possibility of an IPP for owner/managers. Although there are both advantages and disadvantages to the establishment of an IPP, these plans can be highly effective in the right circumstances to save/defer both corporate and personal income taxes.
- Spousal Loans – consider documented personal loan to your spouse, established at the current CRA prescribed rate of 2%. Presumably, your spouse can invest funds to earn in excess of 2% per annum.
- Family Trust – the implementation of a Family Trust to own shares in your Company can be a very powerful vehicle for tax planning, estate planning and business planning purposes. Tax planning advantages can involve the splitting of company dividends with adult family members and access to multiple $800,000 lifetime capital gains exemptions applicable to all family members and reduce tax on the eventual sale of the company.
Attention to the above points early in 2014 should be of assistance to help identify and understand tax planning options. However, in the end, tax planning strategies that are implemented should be customized around the specific facts of your corporate and personal financial situation.
If you’d like to learn more about tax planning strategies for your business, or have any questions about the information above – please feel free to contact me.
Greg Clarke is a Partner with SB Partners, a client focused accounting, tax and business advisory services firm. He can be reached at gclarke@sbpartners.ca or via their website at www.sbpartners.com.