The strategy is simple. Have your corporation pay for expenses that you might have paid for personally. For example, if you are looking at putting an office in your basement so that you can work from home, have your company pay for it. Or if you are having a company barbeque party at your home, have the company buy a new barbeque. When the party is over, leave the barbeque at your home. Or go on a trip and charge it to the business. Is it a business trip or a pleasure trip? The problem is that all of these can be taxable shareholder benefits under Section 15 of the Income Tax Act of Canada. In plain English that means these purchases made by the company are taxable to the shareholders. What is worse is that they can be double taxed. If an auditor finds these benefits to the shareholder paid for by the company, they can not only tax the shareholder for the benefit received, but they can deny the deduction to the company. This is double taxation.
How do you fix this? It is almost impossible in my experience to fix this once it is done and found by the CRA auditor. However, there is some grace given if you find it yourself and act to fix it before it even comes before an auditor. You can also work with your accountant to use legal methods to get similar benefits at reduced tax rates.
We all like to help worthy charities. Often times the charity will suggest making a donation of a product or service from your company to the charity instead of cash. Or they will suggest that there is a tax advantage to making a donation from your corporation. Although both are true; there are good ways and better ways to make donations. There are actually two questions tied into one question. First, should the corporation make the donation or should an individual make the donation? Second, do you donate a product or service or do you donate cash or something else?
Should the corporation make the donation or should an individual make the donation?
We recommend that in most cases, an individual should make the donation not a corporation. This is because in most cases, the individual will get an almost 44% tax refund for making the donation and in most cases the corporation will get an 13% tax deduction for making the donation. Which would you rather have, 44% or 13%?
Do you donate a product or service or do you donate cash or something else?
Many people are in favour of donating a product or service. The reason is often that the donation is worth more than the actual cash cost to the donor. This is because the donor is the business that makes the product or provides the service and they might donate something worth $100 that actually costs them $80. The difference is the normal profit on the item. You might think this is great! I get to claim $100 but it only cost me $80. Canada Revenue Agency can catch this missing $20. The reason is that the "sale" of the donated product or service is supposed to be recorded on the books of the corporation or individual at market value (the same value as recorded on the donation receipt). Sometimes, the corporation missed recording the sale altogether and actually had a donation receipt and inventory shrinkage recorded. This is a form of "double dipping". In the past, when I told clients about this, they were skeptical that Canada Revenue Agency would ever be interested or catch it. Unfortunately, I have to report that two years ago, Canada Revenue Agency has started requesting full documentation from donors. They are requesting not just the donation receipt, but also "proof" of payment. For example, a cheque or in the case of donated products or services, other proof like invoices, etc.
In today's competitive hiring market for employees, many employers are trying to find good incentives to lure and keep great employees. One popular one is the "company car".
The tax rules used to be very prohibitive in this area. The rules have now changed and I can say that in many circumstances, a company car is a cost effective "perk". The problem is that it is not a universally good thing. We find that employees with under 50% business usage of the car are almost never better off than they would have been if you had just given them a raise to match the car costs. We find that it is a bit of a sliding scale between 50% and 100% business usage and that at the top (90 to 100%), it makes business and tax sense. In the middle, we have to look at it on a case by case basis.
The caution here is don't just assume that a company car is a tax effective form of a benefit.
Before 2005, there was a significant double taxation burden placed on business owners that earned over $300,000 in their corporations. To help avoid this, business owners would seek ways of "multiplying" the small business tax rate. This was the lowest income tax rate for corporations and at the time, it only applied to income up to $300,000. Now it applies to income up to $500,000.
I have seen schemes where husband and wife would own parallel businesses out of the same office. Or friends and family would be brought in as co-owners to "multiply" the small business limit. At the time, there was a significant reward in lowering the potential tax rate of 60% on income over $300,000 by 10% or more. The rules changed however and the rates changed as well so that now we can expect a combined tax rate maximum of under 45% in British Columbia. The problem with these schemes today are that they are still being practiced when the tax savings is almost nil % and the risk of penalties and interest if caught is very high.
Let us show you how we can keep your rates lower by using the small business rate and eligible dividends to your best benefit.
In business, the paperwork can be overwhelming to say the least. We find many clients will put paperwork in order of importance. This makes sense.
However, sometimes there are consequences that you do not anticipate. For example, we see clients that do not owe tax on a tax return decide to wait and file it when they have more time. This can have nasty consequences. Let's say for example that your business decided not to file its corporate tax return when it was due six months after the year end. Let's also say that you know with certainty that your corporation has already paid enough taxes so filing late will not trigger a penalty. What you do not necessarily know is how this will affect your other filings with Canada Revenue Agency. There is a rule in place that says in short, "if you miss one filing for one department, then all departments will hold back refunds until all filings are up to date". So let's say your business is expecting a GST refund. Well, that GST refund will be held until the corporate return is filed and assessed. This can mean a delay of many months if you are expecting a refund.
Worse yet, if you get very late on filings, Canada Revenue Agency can take matters in their own hands and file tax returns with estimated numbers. These returns will still not release the held funds, instead they will add to the amounts considered owing and make it even less likely that you will receive a refund when you file a tax return that indicates a refund.
Often times an entrepreneur will consult a lawyer and an accountant when starting a new business. They will also consult a few experienced friends in the business world.
One piece of advice I see people receiving and following is to incorporate their businesses for the tax savings. On the surface, this seems like a good idea because the highest corporate tax rate is a bit over 30% and the highest personal tax rate is 44%. As well, the lowest corporate tax rate stretches all the way from $1 of income to $400,000 of income. That rate is 13%. When you compare 13% to 44%, you tend to jump to the conclusion that incorporation is the way to go.
The devil is in the details they say. On the surface, the tax rates are much different. However, there are other costs to consider besides tax. One very important one is the cost of compliance. I can tell you that a business that is unincorporated might have an annual accounting bill of $500 while a similar incorporated business might have an annual accounting bill of $2,500. There are other costs as well. For example, lawyers and bookkeepers (not to be confused with accountants).
A rule of thumb we use in our office is that each owner must have a taxable income of over $60,000 before it makes economic sense for income and other taxes to incorporate.
This is another "perk" that many employers look at for their employees. It can have a significant impact on the level of "satisfaction" that an employee feels.
There are good ways and better ways to provide a health plan and similar benefits to employees.
A good way for example is to make a plan available to employees on the basis that the employee pays for it. Although this might not sound great, it can actually be good for the employees because now they can get health or disability or other benefits that are very difficult to buy on a "one off basis". They also should be getting a discount from the price of a "one off" plan because of the group benefit concept of pooling risk and costs.
What sometimes is assumed to be better is to have the employer pay for the package. This certainly will save the employee costs up front but can be very expensive in the long run because the benefits might be what we call "taxable benefits". This means that the employee is considered to have received a benefit equivalent to the value of the plan and this is added to the employee's income. This can have a backlash effect on the employees if it is audited by CRA and the employees have some unpaid taxes.This can be made even more complex if the employees and employers split the cost of the plan. (50% / 50%) for example. Without clear documentation the employee could end up with all the tax cost and no one gets the tax savings.
The best plan it to have a professional accountant (like our firm) go through the proposed benefits with you and determine if they are "taxable benefits" or "non-taxable benefits". We find this works very well in plans where the employees and the employers share the costs. The employers pay for the "non-taxable benefits" and the employees pay for the "taxable" ones.
There are actually a lot of details in managing employee plans and there are some very tax effective ways to reduce taxes; for example Private Health Services Plans. The catch is that they are complex to set up correctly and if set up incorrectly can have a big tax cost.
One of the "core" retirement planning objectives of many business owners I meet is to sell their company for a lot of money and get the proceeds tax free thanks to the Capital Gains Exemption for "Qualified Small Business Corporations".
The catch is that few business owners stop to check if they are actually owners of "Qualified Small Business Corporations".
A few surprises that I have seen are:
The business owner didn't own the company that they sold. It was actually owned by another family member or by a holding company. As a result, the business owner didn't get the cash or didn't get the Capital Gain Exemption and perhaps neither did the other family member or the holding company (generally holding companies do not get this special exemption).
The company being sold wasn't a "Qualified Small Business Corporation". The business owner didn't consult with a properly qualified accountant before making the sale.
The company being sold was not a corporation at all. It was an unincorporated division of something or somebody else.
If you stop and take a look at the actual cost of making a mistake here, it is worth taking to a properly qualified accountant first.
On a $2 million dollar sale price for a business that was started for $1, we are talking about a minimum of approximately $1,640,000 and a maximum of approximately $437,000
This is usually excellent advice. In our opinion, every business owner should have some insurance to cover their biggest risk. That is the risk of their own death or disability or a key person's death or disability.
The problem lies not in the purchasing of the insurance, but in the setting up of the paperwork that goes with the insurance.
In term life insurance there are five key people to think of:
1) The person you are insuring
2) The beneficiary of the insurance if the insured person dies
3)The owner of the life insurance
4) The life insurance salesperson
5) The Chartered Accountant
Let me tackle these in the same order:
1) The most common mistake I see here is missing insurance on some owners. For example, let's say a husband and wife own a company. The mistake I see is only buying insurance on the husband. The logic often is that the wife might be working at home and is "less critical" to the business. The reality in our opinion is that the wife is often equally important because of the "domino effect". In a family, if a family member dies, the rest of the family grieves and also picks up that person's load. The husband will be affected by the death of the wife and some insurance could certainly help.
2) The most common mistake we see here is that the beneficiary is not the company. In almost all cases, the beneficiary should be the company. There is an important detail though. This detail is that the company must have a plan in place in its shareholders agreement to pay the insurance out to the surviving shareholders and family. This is the second most common mistake we see. We see that the shareholders agreement is missing or incomplete when it comes to talking about corporate life insurance.
3) The owner of the insurance is more important with other types of insurance for example, "universal life" insurance. In term insurance it is generally set up that the beneficiary is the owner. However, each case is unique and this should be reviewed before the policy is set up. The reason for doing this review in advance is that changing the ownership of a policy can trigger tax.
4) The life insurance salesperson is critical to the proper setting up. Too often I hear stories of "quick sales" with no follow-up on the related documentation like the shareholders loan mentioned above. This can mean that although you have insurance, it is owned by the wrong people or payable to the wrong people.
5) The Chartered Accountant should be contacted early in the process to ensure that details like the shareholders loan are considered and attended to. I can say that many of my clients call me so they can "pick my brain" on this topic.
Feel free to become our client and "pick our brains" on this topic.
This one always surprises me. What it boils down to is that people including experienced business people are afraid of income taxes. So when they hear "capital gains" tax, they assume it is going to be big and they try to avoid it. In actual fact, capital gains taxes are almost the lowest personal income taxes.
Here are the personal income tax rates at the top tax bracket in B.C.
Salary and interest 43.7%
Dividends from large corporations 18.5%
Dividends from small corporations 31.6%
Capital gains 21.9%
So unless you can arrange to get all of your income from large corporations as dividends, the best rates are capital gains rates.
My advice to clients is to actually look for capital gains because of the lower tax rates.
The concept is very similar for corporations but is harder to illustrate. Please feel free to become our client and ask our advice on this issue.
Disclaimer
The information contained in this list is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use.
While we have made every attempt to ensure the information contained in this list has been obtained from reliable sources, Gilmour Knotts Incorporated is not responsible for any errors or omissions, or for the results obtained from the use of this information. Before taking any action that might affect your personal and business finances, you should consult a qualified professional advisor.