Welcome to the treasure trove of tax strategies! With over 30 years of experience, we have been helping small business owners organize finances, create wealth, and transform wealth into a legacy. Here at CPA4IT, our goal is to save you substantially more than it costs you for our services. If you would like to learn how we can help you pay less tax, book your free no obligation discovery call.
This blog is designed to introduce you to some powerful tax strategies, which include, low corporate tax rate, income splitting, income smoothing, home and auto loans, insurance techniques, lifetime capital gains exemptions, personal pension plans, holding companies, and more! Don’t worry; we’ve got your back, and we promise to keep this exciting and informative.
Picture Your Financial Independence
Picture this: you’ve decided to take charge of your finances, but the idea of doing your own taxes for the first time seems daunting. Fear not! We’re here to guide you through the process. Whether you’re an I T Consultant, a management consultant, a real estate agent, or a medical professional, we understand the varying degrees of financial knowledge among our clients. That’s why we cater to your unique needs.
- Low Corporate Tax Rates: Your New Best Friend
Let’s dive right in. We’ll start with one of the foundational tax strategies which is the low corporate tax rate. Did you know that the net tax rate in Ontario is just 12.2% for Canadian controlled private corporations claiming the small business deduction? Amazing, right? But there’s more to it. We help our clients optimize their business to take full advantage of this low tax rate and avoid higher tax rates on certain income.
And speaking of optimizing, we have a bonus for you! You can also take advantage of other tax credits, like the scientific research and education tax credit, to further reduce your tax burden. We have a benchmark analysis which helps you compare your performance metrics to industry averages and industry medians. This ensures that our clients are optimizing their deductions and expenses effectively.
2. Tax Deferral: Time is Money
Next up is tax deferral, which is a very powerful tool. Imagine being able to leave money inside your corporation and invest it at a lower tax rate, growing your wealth faster. Based on their unique situation, we help our clients make the most of this strategy and turn their corporation into a private retirement savings vehicle.
3. Income Splitting: Keep it in the Family
Now, let’s talk about income splitting. It’s about optimizing your family’s tax savings and making the most of every opportunity. Although some recent changes have made it more challenging, our decades’ worth of experience still enables us to devise effective strategies to help our clients take advantage of income splitting opportunities with their partner or family members.This ensures they pay taxes at lower brackets.
4. TOSI: The Game Changer
But, wait! Here’s where things get a little trickier. Those new rules, often referred to as TOSI(Tax on Split Income), have modified the game. Now, there are two primary ways you can split income. You can split income either through salary or through dividends.
When it comes to salary, the general rule is that it must be reasonable for the work performed by the employee on behalf of the corporation. Documentation is key here! Keep track of job descriptions, time sheets, invoices, and, of course, the flow of money.
But, when it comes to dividends, TOSI has introduced three levels of income splitting. It doesn’t prevent you from giving dividends to shareholders, but if they’re subject to TOSI, they’ll pay tax at the highest personal tax rate, erasing the benefits of income splitting.
5. Smooth Operator: Income Smoothing Techniques
Another key aspect we’d like to discuss is income smoothing. This term refers to a range of techniques used by accountants to control and hedge against the effects of income fluctuations. These fluctuations are the peaks and valleys that can occur with both corporate and personal income. We help our clients make the most of income smoothing techniques, so they can minimize the impact of income fluctuations and enjoy a more consistent financial journey.
One of the most powerful tools for income smoothing is the ability to declare income or salary at any point during your fiscal year-end. This flexibility provides you with an opportunity to straddle two different calendar years, particularly if your fiscal year-end falls on any day other than December 31st.
For instance, let’s say you experience a year with higher income. In such cases, we can strategically declare salary for the current year while also considering a portion to be declared for the following year, such as 2024.
But that’s not all! Here’s an exciting bonus – literally! With salary declarations, you have the added advantage of granting yourself a bonus. This bonus can be claimed up to 173 or 183 days which is just shy of six months after your fiscal year-end. If your fiscal year-end is on or after July 31st, you can even push a portion of that income into the next calendar year.
In essence, this means that if your corporation’s fiscal year-end is July 31st or later, you can strategically declare income across three calendar years while efficiently managing expenses within a single fiscal year.
6. Home and Auto Loans and The Flexibility of Personal Pension Plans
Now, here’s a fascinating tax saving strategy – home and auto loans! Did you know that corporations can enter into bonafide loans with employees for home or vehicle purchases? However, the documentation process is complex, and it is crucial to engage an expert who ensures you can make these purchases without personal income tax implications. Don’t worry, we are here to help!
Moving on to Personal Pension Plan, which is a game-changer in retirement planning. With the PPP, you can switch between defined benefit and defined contribution, offering unparalleled flexibility.
7. Lifetime Capital Gains Exemption: The Golden Ticket
Now, let’s unlock the magic of the Lifetime Capital Gains Exemption. Selling shares in a qualifying Canadian business (CCPC) can save you a fortune in taxes. Imagine not paying a cent on gains up to $883,384! Exciting, right? However, it is important to meet the criteria for eligibility – don’t worry; we’ve got you covered with the details!
The criteria include 24 months of share ownership by individuals or related partnerships, and the corporation’s assets being used primarily in active business income. If you’re unsure about these rules, CRA’s website can be a very useful resource for guidance.
8. The Holding Company: Your Financial Fortress
Holding Companies can be your secret weapon against creditors and your ticket to tax optimization. By keeping investments separate from your active business income, you’ll unlock a world of financial advantages. We help our clients set up the perfect holding company tailored to their unique needs.
9. Salary vs. Dividends: The Eternal Debate
One of the most common questions we get is wages versus dividends, which is better. This is an age-old debate. The correct answer to this question depends on your unique situation and needs. Rest assured, we’ll customize the perfect strategy for you, ensuring your financial success.
Another common question we get is based on the principles of home loans and secondary properties. A home loan offers extended repayment, lightening the immediate load. But remember, owning secondary properties may come with capital gains taxes upon sale. As always, it is extremely crucial to consult an accountant who can help tailor customized strategies for your situation.
10. Insurance Strategies: Your Financial Safety Net
Finally, let’s discuss insurance strategies. Leverage life insurance policies, like the ICE maneuver, offer intriguing possibilities for growing your wealth tax-efficiently. This might seem complex but don’t worry; we provide our clients with all the details they need to decide if it’s the right fit for their financial goals.
How can we help?
There you have it—our top 10 tax strategies for small business owners. Here at CPA4IT, our goal is to do more than just measure value, we create it. We are committed to help business owners organize finances, create wealth, and transform that wealth into a legacy. If you would like to learn how we can help you retain more of your hard-earned money, book a FREE consultation with our experts today!