So, What Do You Need to Consider?

The simple answer is that you need to consider any money that either comes in or goes out. However, that’s a little too facile to really be treated as useful advice. After all, when it comes to taxes, how you earn and spend money is often more important than the simple amount involved. You also have to be aware of how things apply over the course of a year, so you can plan things out in conjunction with your accountant or tax preparation expert. While not the only things, here are three factors you need to consider when sitting down to plan your taxes over the course of the next fiscal year.

Small Business Deduction

The Small Business Deduction, or SBD, is one of the most important deductions available to your CCPC. The SBD exists to benefit small Canadian businesses by reducing the effective federal income tax rate for eligible businesses to 9% from 28% for the first 500,000 dollars of income. The full deduction is available to businesses with up to $10 million of taxable capital, provided that capital is employed in Canada, falling to zero for businesses with $15 million of Canadian-employed taxable capital.

It’s important to understand that the SBD doesn’t apply to all income, and in fact certain income can actually reduce the amount of the small business deduction available to your CCPC. In particular, the amount of investment income your corporation earns can have a significant impact on your eligibility for the small business deduction. As it currently stands, the new restriction does not kick in until your CCPC exceeds $50,000 in investment income. Any investment income over $50,000 reduces the deduction by a factor of 5; taking $5 from the deduction for every dollar of additional investment income earned.

Thus an additional $100,000 of investment income earned above the $50,000 threshold will completely eliminate your corporation’s eligible small business deduction.

It can be worthwhile to protect your SBD by reducing your investment income, but it’s important to remember that any changes to your corporation’s financial strategy have to make sense from a financial perspective. You can’t simply make changes to minimize your taxes at the expense of other aspects of your business’s financial health. One approach you can take is shifting from bonds to equity since share sales are only taxed on 50% of the gains while sales of bonds are taxed on the full amount.

As always, this is very much a case where you really need to work with your accountant or other financial planner rather than going it alone.

Assets and Capital Gains

When it comes to managing your assets, it’s always a good idea to time your sales and purchases with regard to the fiscal year. Capital assets often make up a major part of your CCPC’s total value, and that is reflected in your tax burden. Luckily, when you perform an asset transfer can provide a significant benefit for the associated tax liability.

Capital assets are best purchased before the end of your fiscal year, but only if you’re able to make them available for use in the same fiscal year they are purchased. As long as any such asset has been acquired and has been placed into use before the end of the fiscal year, you can reduce your taxable income by claiming up to half the capital cost allowance, or CCA. You also retain the flexibility to claim the full CCA the following year.

When it comes to sales, the first question is whether there are any capital gains involved. If there are, your best option is to delay the sales until just after the new fiscal year begins. The big advantage deferring the sale is that you can also defer any capital gains taxes due until the end of the fiscal year. You also get to claim a full year of CCA as you owned it for the entire fiscal year.

Salaries for Family Members

Many CCPCs are actually family-owned, and this often adds additional wrinkles to your associated tax liabilities. Most such businesses compensate family members through a mix of direct salaries and dividend payouts. While this is very common, the taxation has become more complicated since the expansion of what are known as tax on split income, or TOSI, rules. These rules are designed to restrict business owners’ ability to use the business to transfer income to other family members in order to reduce their overall tax burden.

One result of the new rules is that dividend income paid by private corporations is subject to a high tax rate, reducing the benefits of splitting incomes. This doesn’t mean it isn’t possible to split incomes efficiently, but it does mean that given the complexity of the new rules it’s in your best interest to take the advice of your accountant or other tax professional.

One way to deal with the issue is through hiring family members and paying them as employees. This gives them their own income from the business, which therefore does not count as income splitting. The catch here is that you have to pay family members appropriately, and keep documentation to support that you are paying market rates.

Conclusion

Corporate taxes are not the same as individual taxes, and you don’t want to get caught out paying more than you owe because you didn’t understand the differences. Consulting a tax professional can help you keep control of your finances and structure your income and expenditures to ensure you have no surprises once you hit tax time. Your business is worth too much to go it alone.

The post Planning Your Corporate Taxes appeared first on R N Hill Chartered Professional Accountant Group.

For most people, the first thing you should do is talk with an accountant or tax professional about your business plan in order to get advice from someone who can guide you through the advantages and drawbacks of incorporation for your particular situation.

Advantages of Incorporation

So why would you want to incorporate anyway? You can run many businesses quite comfortably as a sole proprietorship without going through incorporation. It’s quick and easy to set up, and makes it easy to start doing business without jumping through a lot of hoops. Still, there are a number of definite advantages to incorporating your business.

Limited Liability

One of the most significant advantages of incorporation is the liability protection it provides. When you set up a corporation, you create a new legal person that can take on the liabilities of the business. This makes it much more difficult for someone to go after your personal assets for the debts of the corporation. It’s not complete immunity, but it puts you in a much better financial situation if things go wrong, and every business owner needs to be prepared for just that eventuality.

Lower Tax Rates

Another advantage of incorporating your business is that businesses are subject to lower tax rates than high-income individuals. Depending on the amount of revenue your business makes in a year, these lower rates can lead to significant savings.

Easier to Transfer Ownership

Because ownership of the corporation is vested in the form of shares instead of personal ownership, it’s much easier to transfer some or all ownership from one entity to another. You simply sell or otherwise transfer the requisite number of shares and are done with it. This is particularly helpful when dealing with venture capitalists who will often fund your business for an ownership stake in the company. Incorporation makes it easier for them to buy in, and to sell out once it is time to recover their investment.

Greater Access to Capital

Incorporation also enables your business to take advantage of certain Federal Government programs that are only available to incorporated businesses. Many banks are also more likely to lend to incorporated This is in addition to advantages such as greater ability to benefit from working with venture capitalists mentioned above.

Anonymity

Depending on your personal position and the nature of your business, you may not want other people to know of your connection to the business. Because a sole proprietorship is essentially part of your personal finances there is no real way to maintain privacy. A corporation, on the other hand, does provide that privacy barrier so that you can keep the public from knowing your business.

Drawbacks of Incorporation

Looking at the list above you might think that incorporation is absolutely perfect and the right choice for any business at any time. Unfortunately, while incorporation does offer a lot of benefits, it does come with significant drawbacks as well, and you have to be able to balance them against each other before making the final decision.

Setup, Administration, and Overhead

When compared to proprietorships and partnerships, incorporated businesses require far more money and effort to set up and run. These additional layers of administration and overhead all add to the cost of running a corporation instead of a proprietorship. Smaller businesses often lack the resources to support this overhead.

Complexity and Regulation

One of the other drawbacks of a corporation is that it is subject to far more regulation than a sole proprietorship. There are two issues at play here: both the obvious issue of implementation, and the somewhat less obvious issue of simply knowing all the regulations you have to follow. This is one area where you really need to consult a professional.

Inability to Offset Losses

One important advantage to a sole proprietorship, especially when you are just starting out, is that you can use other income and assets to help offset business losses. This is not possible when you incorporate your business because incorporation builds a wall between your personal and business finances.

When Should You Incorporate?

So after considering all these factors, is there a way to know when your business should incorporate? Without knowing all the facts of the situation it can be difficult to make a hard and fast resolution but there are some situations where it makes sense for most business owners to make the leap.

When it Will Save You Money

One of the easiest times to make the decision to incorporate is when it will save you money. The more revenue that your business generates the more you are going to benefit from the lower tax rates and other tax advantages available to a corporation. This is why so many larger businesses incorporate; it makes better financial sense.

When You are in a High-Risk Industry

Not all business risk is created equal, and some businesses are naturally riskier than others. Take for example businesses like wedding planners, caterers, and photographers. All these businesses can serve people during high-stress situations, and it’s important to be able to protect your other assets if they choose to sue you.

Conclusion

If your business is in any way successful, there will come a time when you will want to incorporate. The question is when, and the answer is always when it makes sense for your business. If you’re not sure whether it’s time, consult an accountant or other professional who will be able to walk you through the decision so that you can determine the best time for your business.

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