Some the most intriguing topic on the minds of Toronto business owners of private companies is on ways to minimize their tax liability and operate their business in a tax efficient manner. Generally accounting and tax matters are not the priorities of the business owners; however, being proactive and being in touch with your tax accountant and professional can help you save on taxes and eliminate issues when its tax compliance/filing time. MP Group is a Toronto based accounting and advisory firm that helps companies in the GTA reduce their taxes and protect companies from making decisions that lead to adverse tax consequences.
Canadian controlled private corporations (CCPCs), which are basically Canadian corporations that are owned by residents of Canada, qualify for the small business deduction of $500,000. This means, that the taxable income earned in the corporation up to $500,000 can benefit from the lowest tax rate of 15.5%. This is significantly lower than earning $500,000 in employment income or property income. Therefore, leaving profits and funds earned in the company can provide a great tax deferral opportunity and can be used to reinvest in the business. For example, the profits earned will be taxed at 15.5% which means you have more funds after tax to use to acquire equipment, inventory, or expanding your business.
MP Group provides valuable insight to shareholders as to the optimal way to withdraw funds from the corporation to the shareholder. We first start by determining the amount of expenses that the shareholder expects to incur personally and their investment goals. We also look for income splitting opportunities such as whether the owner can issue another class of shares to their spouses or adult children (over 18 years old). Then we determine the optimal mix between dividends or salaries. For shareholders who do not earn other sources of income, we suggest a dividend as up to about $35K of dividends can be taken out of the corporation which will be tax free at the personal level in the hands of the shareholder. If taxable income is greater than $500,000 in the corporation, it may be a good idea to "bonus" down or pay salary to the shareholder to get close to the $500,000 taxable income level. Also, if salary is taken, that provides an opportunity to invest through your RRSP and benefit from the personal tax deduction available.
We have seen many issues faced by business owners that could have been avoided if they had been in touch with their tax professionals. Certain matters such as withdrawing funds from the company can lead to tax consequences. A lot of times where corporate tax issues arise is when a company has a receivable from the shareholders. There are tax consequences when the shareholder receivable on the balance sheet of the corporation is outstanding for more than a year. Therefore, we always let our clients know that whenever they are thinking about taking funds out of the corporation to speak with an MP Group professional beforehand to avoid potential issues in the long run.
There are other transactions that lead to tax implications such as acquisition of control which can lead to a deemed year end for the acquired, foreign transactions which can lead to withholding tax issues, etc. which should be addressed throughout the year and proactively consider the tax issues that may arise. Furthermore, determining the most tax efficient corporate structure can help minimize taxes. Most are not aware that dividends between connected corporations can be issues without any tax consequences which can provide other planning opportunities.
Furthermore, being compliant on reporting to the CRA and diligent on meeting filing deadlines ensure that the company does not waste dollars on interest and penalties. We remind our clients when corporate tax payments are due (two months from the year end), and reporting deadlines on information returns such T4 and T5 filings (due by February as follows a Calendar year) as these are items that are forgotten upon with management. Also, determining instalment payments and making them on time ensures that the CRA will not charge interest or penalties for late payments.
As such, there are many transactions that lead to tax consequences. There are also ways to minimize taxes yearly. As such, it is important to have a tax professional alongside the business to ensure that the business does not lose funds towards tax when not needed. It is always a great idea to be proactive with tax matters rather than seeing the tax bill upon tax season. Your tax professional is part of your business and can save you taxes and ensure you make the best business decision from a tax perspective.